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Québec Announces New and Expanded Measures to Combat Aggressive Tax Planning
Québec’s Ministry of Finance (Finances Québec) recently published Information Bulletin 2019-5 (Bulletin) setting out new and significantly expanded measures to combat aggressive tax planning. These measures (published on May 17, 2019 and alluded to in the Québec budget of March 21, 2019) are the newest in a series of recently announced measures intended to protect the integrity and fairness of Québec’s tax system, and may have a significant impact on the reporting obligations of taxpayers as well as their ability to conduct business with the Government of Québec.
The measures identified in the Bulletin focus on three categories:
- new rules to counter sham transactions;
- mandatory disclosure of nominee agreements; and
- mandatory disclosure of “prescribed transactions.”
- Taxpayers who participate in sham transactions will incur a penalty equal to the greater of $25,000 and 50% of the amount of tax otherwise payable had the sham transaction not been concluded. Advisers and promoters who promote transactions involving a sham will also be subject to a penalty equal to 100% of the fees earned in respect of the sham transaction. In addition, the normal reassessment period will be extended by an additional three years for taxpayers who are parties to a sham (or who are members of a partnership that is a party), as well as for any corporations associated with or persons related to such taxpayers. Finally, taxpayers, advisers and promoters who are ultimately found to have engaged in (or promoted) sham transactions will be prevented from contracting with the Government of Québec. The circumstances in which partners of a partnership that engages in a sham could be subject to penalties or be prohibited from contracting with the Government of Québec are unclear.
- Taxpayers will be required to disclose to Revenu Québec any nominee agreements entered into on or after May 17, 2019. Nominee agreements entered into before that date may also need to be disclosed to Revenu Québec if such agreements relate to transactions that continue to have tax consequences after May 17, 2019. Failure to disclose a nominee agreement on time may result in penalties of up to $6,000. This measure should be of particular interest to taxpayers operating in the real estate industry, where nominee agreements are frequently used.
- Revenu Québec will be publishing a list of “prescribed transactions” that it has identified as being aggressive. Taxpayers will thereafter be obliged to disclose to Revenu Québec any transactions that are “very similar, but not necessarily identical” to those specified by Revenu Québec in its published list. Failure to disclose such prescribed transactions (or failure to correctly ascertain whether a transaction is very similar to a specified transaction) will result in a penalty of up to $100,000, as well as an additional penalty equal to 50% of the tax benefit generated as a result of the prescribed transaction. Advisers and promoters will also be obliged to disclose to Revenu Québec any prescribed transactions they commercialize or promote and will also be subject to penalties for failure to disclose.
A sham is a transaction or a series of transactions conducted with an element of deceit in order to mislead the tax authorities as to the true nature of the taxpayers or transactions at issue. Since sham transactions are intended to obfuscate the real underlying legal relationships, tax authorities may find it difficult to effectively conduct their audit activities or otherwise enforce the relevant tax legislation.
To provide Revenu Québec with additional tools to combat sham transactions, Finances Québec has announced three new measures pertaining to shams that will apply to transactions or series of transactions that begin after May 17, 2019. Series of transactions begun by May 17, 2019 and ending before August 1, 2019, will not be subject to these new rules.
The first measure consists of new penalties imposed on taxpayers who participate in shams, as well as advisers and promoters who have promoted tax plans involving shams. Taxpayers who participate in shams will be liable for penalties equal to the greater of $25,000 and 50% of the amount of tax otherwise payable had the sham transaction not be concluded. It is unclear whether partners (including the limited partners) of a partnership that has participated in a sham would be subject to penalties. Advisers and promoters of shams will be liable for penalties equal to 100% of the fees they charged regarding the sham transactions. For these purposes, the term "adviser" will have the same meaning used in the current mandatory disclosure regime for aggressive tax planning, and the term "promoter" will have the same meaning used in the application of Québec's general anti-avoidance rule.
The second measure relates to the extension of normal reassessment periods in respect of sham transactions. As set out in the Bulletin, Revenu Québec will be given an additional three years beyond the normal reassessment period to reassess any of the following:
- a taxpayer who is a party to a sham;
- a taxpayer who is a member of a partnership that is a party to the sham;
- a corporation associated with the taxpayer or the partnership that is a party to the sham at the time it is made;
- a corporation associated with a taxpayer who is a member of a partnership that is a party to the sham at the time it is made;
- a person related to the taxpayer or the partnership that is a party to the sham at the time it is made; and
- a person related to a taxpayer who is a member of a partnership that is a party to the sham at the time it is made.
In addition, the statutory limitation period otherwise applicable to a taxpayer will be suspended when the taxpayer is subject to a formal judicial demand concerning unnamed persons relating to a sham. The suspension period will begin on the date Revenu Québec files an authorization request with the Court of Québec and will cease when the request is disposed of and the taxpayer has complied with the demand.
The measures related to reassessment periods are of particular note because the extended three-year reassessment period would seem to apply to persons (namely, associated corporations and related persons) who are not themselves parties to the sham and may not even be parties to transactions forming part of the same series of transactions involving a sham. Moreover, although the Bulletin suggests that an intention to mislead the tax authorities is generally a shared one for all parties involved in a series of transactions involving a sham, this may not be true in all instances; the Bulletin does not clarify whether an unwitting related party would be subject to these rules. It is hoped that the extent of these risks will become clearer once draft legislation is released.
The final measure is to ban taxpayers that have been penalized for participating in shams, as well as their advisers and promoters, from entering into public contracts with the Government of Québec. More specifically, taxpayers who have been the subject of a final assessment (namely, an assessment in respect of which all rights of objection or appeal have lapsed) that has imposed a penalty in respect of a sham, as well as advisers and promoters of a plan involving such a sham, will be registered with the Autorité des marchés publics in the register of enterprises ineligible for public contracts. It is unclear whether partners (including the limited partners) of a partnership that has participated in a sham would be subject to the ban. Moreover, the length of the ban is not indicated in the Bulletin.
Mandatory Disclosure of Nominee Agreements
Under Québec civil law, a nominee agreement is a lawful form of a contract of mandate under which a person (the mandatary) acts on behalf of another person (the mandator) but gives the appearance of acting in the mandatary’s own name. Among other areas, these agreements are frequently used in the real estate context, particularly in complex joint venture structures involving multiple participants. Although nominee agreements are undoubtedly valid under Québec law, Revenu Québec has long taken the position that for a nominee agreement to be recognized for tax purposes, the mandator and the mandatary must disclose the existence of the agreement and reveal its content to Revenu Québec. In the past, such disclosure was typically made at the audit stage, although Revenu Québec has in recent years requested that such disclosure be made in the parties' tax returns for the year in which the parties entered into the agreement.
However, from now on, and to ensure that Revenu Québec is promptly notified of transactions involving nominees, Finances Québec has announced that Québec’s tax legislation will be amended to require parties to a nominee agreement made as part of a transaction or a series of transactions to disclose the agreement to Revenu Québec. The disclosure must be made through a prescribed information return with Revenu Québec. Although the prescribed form itself has yet to be released, the Bulletin indicates that the prescribed information must include the following:
- the date of the agreement;
- the identity of the parties to the agreement;
- a full factual description of the transaction or series of transactions to which the nominee agreement relates, as well as the identity of any parties for which such transaction or series has tax consequences; and
- any other information requested on the prescribed form.
The information return must be filed with Revenu Québec within 90 days of the concluding of the nominee agreement, but needs to be filed by only one of the parties to the agreement. Failure to file the prescribed form within the 90-day limit will result in the parties to the nominee agreement being jointly liable to a $1,000-penalty, plus an additional penalty of $100 per day (up to a maximum of $5,000) starting on the second day of the omission. Moreover, failure to file the prescribed form on time will result in the suspension of the statutory limitation period otherwise applicable to a taxation year for a person participating in a nominee agreement (although the Bulletin does not specify when any such suspension would be lifted).
These measures will apply to nominee agreements concluded on or after May 17, 2019. In addition, nominee agreements entered into before May 17, 2019, and that relate to transactions that continue to have tax consequences after May 17, 2019, will need to be disclosed to Revenu Québec no later than September 16, 2019. Finances Québec has not specified the instances in which a nominee agreement will be considered to “continue to have tax consequences.” Taxpayers (including those operating in the real estate industry) will therefore need to carefully consider whether a particular nominee agreement entered into before May 17, 2019, will need to be disclosed.
Mandatory Disclosure of “Prescribed Transactions”
For the past 10 years, Québec has required that taxpayers disclose transactions that contain certain indicia of aggressive tax planning: transactions for which the adviser requires confidentiality from the client, transactions for which the adviser’s remuneration is conditional on the occurrence of certain events and transactions involving contractual coverage to protect the client from certain events. Where any one of those conditions is present – and where a transaction results in a tax benefit to a taxpayer of $25,000 or more, or an impact on the income of a taxpayer (or a partnership of which the taxpayer is a member) of $100,000 or more – the transaction must be disclosed to Revenu Québec. Québec also imposes significant penalties on taxpayers, advisers and promoters who engage in, or advise on or commercialize, such aggressive tax plans and fail to meet their mandatory disclosure obligations.
As set out in the Bulletin, the scope of Québec’s mandatory disclosure regime will be expanded significantly. Similar to the U.S. Internal Revenue Service’s publishing of “listed transactions,” Revenu Québec will be publishing, at a time it deems appropriate, a list of “prescribed transactions” that it considers to be aggressive and that will be subject to mandatory disclosure. Thereafter, taxpayers will be required to disclose transactions or series of transactions that are “very similar, but not necessarily identical to” the specific types of prescribed transactions on the list. It appears that the onus will be on the taxpayer to ascertain whether a transaction is very similar to a listed transaction, and a failure to correctly ascertain and disclose a very similar transaction will result in severe consequences for the taxpayer.
More specifically, the mandatory disclosure mechanism will require a taxpayer who carries out a prescribed transaction (or who is a member of a partnership that carries out such a transaction) to file an information return with Revenu Québec. Although the prescribed form itself has yet to be released, the Bulletin indicates that the prescribed information must include the following:
- the identity of all parties involved in the prescribed transaction and the relationship between them during the course of the transaction;
- a full description of the facts of the prescribed transaction;
- a description of the tax consequences resulting from the prescribed transaction for the taxpayer; and
- any other information requested in the prescribed form.
The information return must be filed with Revenu Québec by the later of (i) 60 days after the day on which the prescribed transaction begins, and (ii) 120 days after the day on which Revenu Québec first publicizes the prescribed transaction for which disclosure is mandatory. A taxpayer who fails to file this information return will incur a penalty of up to $100,000, and the statutory limitation period applicable to a taxation year covered by this information return will be extended by three years, as it is under the current mandatory disclosure regime for aggressive tax planning. A taxpayer who fails to report a prescribed transaction will also be liable to a penalty equal to 50% of the amount of the tax benefit resulting from the prescribed transaction.
Advisers and promoters of prescribed transactions that do not require a material change when implemented for different taxpayers will also be required to file an information return with Revenu Québec. Although the prescribed form itself has yet to be released, the Bulletin indicates that the prescribed information must include the following:
- a full description of the facts of the prescribed transaction; and
- any other information requested in the prescribed form.
The information return must be filed with Revenu Québec by the later of (i) 60 days after the day on which the adviser or promoter first commercializes or promotes the prescribed transaction, and (ii) 120 days after the day on which Revenu Québec first publicizes the prescribed transaction for which disclosure is mandatory. An adviser or promoter who fails to file an information return will incur a penalty of $10,000 and an additional penalty of $1,000 per day, up to $100,000, starting on the second day of the failure to file, and will also incur a penalty equal to 100% of the fees charged with respect to the various taxpayers to whom the adviser or promoter commercialized or promoted the undisclosed prescribed transaction.
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