CRA publishes detailed guidance documents relating to new mandatory disclosure rules

The CRA has published two separate documents relating to the new and expanded mandatory disclosure rules, which became law on June 22, 2023. For discussion of those rules, see our previous tax alert and blog post.

The first new CRA document is an “Overview” that provides a high-level description of the mandatory disclosure rules and summarizes how to make a disclosure. The second is a more detailed “Guidance” page that describes the background of the disclosure rules and the CRA’s planned administrative approach. While not legally binding, the CRA’s administrative publications can be useful for compliance purposes.

In the Guidance, the CRA outlines its interpretation of the three “hallmarks” that determine whether a transaction is “reportable” under the expanded reportable transaction rules (see our previous tax alert for a description of those hallmarks). Among other things, the Guidance states that the following would not generally constitute a “hallmark” for purposes of the reportable transaction rules:

• standard price adjustment clauses (as contemplated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses);
• normal professional liability insurance of a tax practitioner; and
• certain forms of contractual protection that the CRA refers to as “insurance” that is integral to the arm’s length acquisition of a business at a price that accounts for pre-sale tax liabilities of the business (assuming the “insurance” is obtained primarily for purposes other than to obtain a tax benefit), such as:
  • tax insurance of section 116 risks;
  • contractual protection in respect of certain pre-sale safe income planning;
  • indemnities relating to pre-closing tax issues or the amounts of existing tax attributes; and
  • paragraph 88(1)(d) bump denial protection covenants and indemnities in respect of acquisition by public companies.

The CRA cautions that it would consider certain forms of contractual protection to be “hallmarks” if they cover “specific identified tax risks”. It is unclear what the CRA means by “specific identified tax risks”.

In the Guidance, the CRA provides examples of certain contingent fee arrangements that it would not view as a “hallmark”. Notably, the examples in the Guidance go beyond those previously given by the Department of Finance in the Explanatory Notes for the new mandatory disclosure rules, and include certain fee arrangements contingent on the number of returns prepared and fees for the preparation of tax returns that result in a taxpayer obtaining a tax refund.

The Guidance also discusses the new “notifiable transaction” rules and legislated exceptions but much of the commentary merely describes the legislation or restates portions of the Explanatory Notes previously issued by the Department of Finance.

Further, the Guidance attempts to clarify certain aspects of the new reportable uncertain tax treatment rules, including: when a tax treatment must be reported, how to convert other currencies into Canadian dollars for reporting purposes, and how the rules apply to different accounting methods, partnerships, and consolidated groups.

As of the date of publication, neither the “Overview” nor the “Guidance” webpage identifies any transactions or series of transactions that have been designated as notifiable for the purposes of the “notifiable transaction” rules. The relevant disclosure forms – an updated Form RC312 in respect of notifiable and reportable transactions and new Form RC313 in respect of reportable uncertain tax treatments – are also still forthcoming. Finally, the CRA expressly cautions that its approach to the updated mandatory disclosure rules will develop over time.