On May 7, 2019, the Quebec government announced its intention to take additional measures aimed at profiling certain tax planning schemes. Following these announcements, Bill 42 was enacted on September 24, 2020. This Act introduces three (3) categories of transactions that must now be disclosed to the Quebec tax authorities. These measures have since been a constant source of uncertainty as to their interpretation and application in practice. The debate was recently revived when, during the tabling od the federal budget, the federal government announced its intention to introduce similar measures.
1. Nominee Agreement
Any taxpayer party to a “prête-nom” agreement (also referred to as a nominee agreement) in effect as of September 24, 2020 or entered into after this date must now disclose its content within 90 days of the conclusion of the contract, if this transaction has tax consequences. Although several agreements of this type are entered into for purely commercial reasons, particularly in real estate matters, the question of whether the agreement has tax consequences remains very difficult to determine in practice. This “vagueness” generates a lot of uncertainty, especially since the Agence du Revenu du Québec (the “ARQ”) has stated that it considers these measures to be broad in their application. Many taxpayers therefore choose, out of caution, to proceed with the disclosure. Failure to file a disclosure results in a penalty of up to $5,000 and allows the ARQ to contribute at any time until the disclosure is filed. The obligation to disclose a nominee agreement also applies to an agreement relating to property located outside Québec, if the taxpayer who is a party to the agreement is subject to Québec tax.
2. Covered or Confidential Transactions
A second category of transactions covered by these obligations concerns transactions (i) covered by a confidentiality clause, (ii) offering remuneration to the adviser conditional on obtaining tax benefits, or (iii) offering protection or guarantee of result to the taxpayer. If the transaction falls into one of these categories and provides a tax benefit of $25,000 or more or has an impact on income of $100,000 or more, the taxpayer must disclose it, failing which the ARQ could assess the taxpayer tax at any time until the disclosure is filed. Added to this is a penalty of up to $100,000, a penalty of 50% of the net tax benefit and registration in the Register of enterprises ineligible for public contracts (REIN). Failure to disclose would also allow the ARQ, in certain circumstances, to benefit from a period of six (6) years to issue a notice of assessment instead of the normal period of three (3) years.
3. Specified Transactions
The Quebec government has also introduced disclosure obligations with respect to transactions that qualify as “specified transactions”. This measure gives the power to the tax authorities, upon adoption of a regulation, outside the usual framework of the process of adopting legislative amendments, to quickly intervene to target tax transactions. Failure to disclose a given transaction entails consequences and penalties similar to transactions in the second category. In addition, the advisor or promoter who markets a specific transaction must comply with the disclosure obligation, failing which it is liable for a penalty of up to $100,000 in addition to a penalty corresponding to 100% of its fees.
The first set of specified transactions were published on March 17, 2021 and were recently the subject of additional clarifications. Generally, they relate to (i) certain types of planning aimed at avoiding the taxation of capital gains of trusts established 21 years ago or more, (ii) transactions allowing the transfer of funds to countries with which Canada or Quebec has not signed a tax treaty, (iii) the “creative” planning of certain share sales so as to multiply the deduction for capital gains, and (iv) transactions aimed at acquiring tax benefits (e.g. tax losses, etc.)
The time limits prescribed for the obligation to disclose specified transactions are currently either two (2) months (60 days) following the date determined by regulation or four (4) months (120 days) following the adoption of the government decree. In the case of the advisor or the promoter, the period of sixty (60) days begins from the date of the start of the promotion of the transaction.
The Canada Revenue Agency (the “CRA”) recently proposed similar and even more restrictive legislative measures on May 4, which were included when the federal budget was tabled on April 1, 2022. They are currently the subject of public consultations. We will follow the evolution of these consultations and will deal with them in a future publication.
An increasingly complex environment
These tax profiling tools are in addition to the many current rules and contribute to increase the unpredictability of tax results with respect to certain tax planning schemes. In addition, the requirement to disclose certain transactions may arise at any time pursuant to a regulation. Do not hesitate to consult our tax specialists who can assist you and help you better understand this tax environment.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
Sergei Titorenko is an Associate at Levy Salis LLP and a member of the Quebec Bar. He devotes his practice to US and Canadian tax and estate planning, Canadians doing business in the United States, Americans living in Canada, US real estate transactions for Canadians, and cryptocurrency transactions.