Reining in aggressive tax planning

  • May 31, 2022

The government of Canada is committed to making the tax system fair for everyone, it says in its Budget speeches. One of the tools it can use to reach that goal is to uncover aggressive tax planning schemes. The Canada Revenue Agency distinguishes “aggressive” tax planning from the legitimate kind in that the former is a way to get around the intent of the law. The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, in a letter to Finance Canada, comment on reportable and notifiable transaction proposals included in draft legislation designed to curb aggressive tax planning.

As the federal government noted in its 2021 Budget, “the lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main challenges faced by tax authorities worldwide.” That’s why it seeks to create a reporting system that would accelerate the speed with which the CRA receives information on aggressive tax planning.

The Joint Committee notes this system needs to achieve the right balance. “If too many transactions, and in particular, transactions that are not aggressive tax planning are subject to the rules, this will increase administration and costs for both the CRA and taxpayers without providing valuable incremental information to the CRA.”

Another important concern is to ensure a reporting system does not deprive taxpayers and their advisors from having clarity and certainty about what the tax and reporting rules are. “If the reporting requirements are not clear, then this can lead to over-reporting (i.e. information returns will be filed for routine tax planning and other transactions for which additional reporting would not be useful),” the letter says.

In the Joint Committee’s view, reporting requirements “should be restricted to information that warrants a short deadline, being information that cannot wait until an income tax return or other filing is made.”

The letter then goes through the Joint Committee’s views on the detailed rules for reportable and notifiable transactions.

Reporting requirement for trusts

In a separate letter, the Joint Committee agrees financial transparency is an important policy issue, and refers Finance Canada to a 2018 submission on filing and reporting obligations for certain trusts. Now it has concerns with the approach proposed in draft legislation to obtain information about beneficial ownership of bare trust arrangements. We believe, the letter reads, “that for income tax reporting purposes, the best approach is to have the beneficial owner report the tax outcomes related to the property and not the trustee.”

When it comes to bare trusts, which are often used in Canada for instance in real estate to hold title to land when a beneficial owner is unable to be the registered legal owner, the Joint Committee is of the view that filing both a trust income tax and information return with related reporting of trustee and settlor/beneficiary details, misses the mark. It won’t “provide any meaningful information regarding the property that is held subject to the trust. It will merely indicate that such an arrangement exists,” the letter reads, before making detailed recommendations for ways to make obtaining beneficial ownership information more efficient.

Avoidance of tax debt

In yet another letter, the Joint Committee offers suggestion on the concept of avoidance of tax debt, introduced in the 2021 Budget. These refer to “complex transactions that attempt to circumvent the tax debt avoidance rule,” as per the text of the draft legislation.

The Joint Committee supports the objectives of the draft legislation but worries the proposals can be read as going well beyond the egregious tax avoidance situations they are intended to target. The purpose test in particular should be “re-framed as a ‘one of the main purposes’ test,” the letter says. This would be consistent with the legislative aim to preclude complex plans or schemes that are designed to circumvent the rules in section 160 of the Income Tax Act.