Tax Insights: Quebec mandatory disclosure requirements ─ Deadline for reporting “specified transactions” coming soon!

Issue 2021-16

In brief

Amendments made to the Taxation Act by Bill 42¹ (2020, Chapter 16 of the Statutes of Québec) expanded Quebec’s mandatory disclosure rules for aggressive tax planning to include a requirement to disclose certain transactions. These transactions, referred to in the Taxation Act as "specified transactions," are to be determined by the Minister of Revenue and published in the Gazette officielle du Québec from time to time, which means that the list of transactions could grow over time.

On March 17, 2021, the Minister of Revenue published its first mandatory disclosure regulation, which listed four types of specified transactions:

• avoidance of deemed disposal of trust property
• payment to a non-treaty country
• multiplication of the capital gains deduction
• tax attribute trading

The new disclosure requirements will apply to specified transactions that begin after March 17, 2021.

In detail

Specified transactions that require mandatory disclosure

The Taxation Act states that a specified transaction by a taxpayer or partnership is a transaction whose form and substance of the facts specific to the taxpayer or the partnership are significantly similar to the form and the substance of the facts of a transaction determined by the Minister of Revenue and published in the Gazette officielle du Québec. On March 17, 2021, the Minister of Revenue published four types of specified transactions, which are discussed below.

Transaction 1: Avoidance of deemed disposal of trust property

These transactions are designed to avoid the deemed disposal of a trust's property at certain times, such as on its 21st anniversary, in order to defer tax on an accumulated gain. This provision applies, among other things, when a trust that resides in Quebec distributes property and after the distribution another trust holds the distributed property directly or indirectly. Both the distributing trust and the trust that will hold the property as a result of the transaction are responsible for the disclosure requirements.

The deadline to file the disclosure is the later of:

• 60 days after the distribution, and
• July 15, 2021

Transaction 2: Payment to a non-treaty country

These transactions allow at least $1 million to be deducted when calculating the payer's income for income tax purposes. The payer may be:

• an individual or a trust residing in Quebec
• a corporation that has an establishment in Quebec, or
• a partnership, each member of which is required to file an information return

The payer must operate a business in Quebec and the recipient must be a foreign entity located in a non-treaty country. As well, the payer and recipient must deal at non-arm’s length with each other. The obligation to disclose the transaction rests with the payer.

The deadline to file the disclosure is the later of:

• the tax return due date for the payer, and
• July 15, 2021

Transaction 3: Multiplication of the capital gains deduction

These transactions are used to multiply the capital gains deduction for shares of a qualified small business corporation. These transactions often involve a spouse or use a trust. In addition, Revenu Québec has indicated that it monitors transactions when the facts may be similar to the facts in the following court decisions:

• Laplante v. Canada, 2017 TCC 118 (upheld on appeal, Laplante v. Canada, 2018 FCA 193)
• Gervais v. Canada, 2018 FCA 3

The taxpayer who claims the capital gains deduction for the disposition of the shares must make the disclosure.

The deadline to file the disclosure is the later of:

• 60 days after the disposal date of the shares or the transfer or loan that gave rise to the transaction, and
• July 15, 2021

Transaction 4: Tax attribute trading

These transactions use certain tax attributes (e.g. a non-capital loss or a tax credit that can be carried forward). A targeted transaction would be a transaction in which:

• tax attributes are traded between unaffiliated taxpayers, or
• as a result of the acquisition of a share or an interest in a share of a taxpayer with tax attributes, a new business begins to operate

Revenu Québec also referred to the following court decisions, which involved similar facts:

• Deans Knight Income Corporation v. Canada, 2019 TCC 76
• Birchcliff Energy Ltd. v. Canada, 2019 FCA 151

The taxpayer using the tax attribute is required to make the disclosure.

The deadline to file the disclosure is the later of:

• the tax return due date for the first tax year that the taxpayer uses the tax attributes, and
• July 15, 2021

Forms and penalties

Form TP-1079.DI

Form TP-1079.DI “Mandatory or Preventive Disclosure of Tax Planning” must be used for all mandatory disclosures.

Financial penalties

For the non-disclosure of a designated transaction, the law provides for a penalty of $10,000 for filing Form TP-1079.DI late and $1,000 for each additional day thereafter (up to a maximum of $100,000).

An additional penalty also applies for this omission. It equals 50% of the tax benefit that would result from the transaction if the anti-avoidance provisions did not apply.

Extension of the reassessment period

The start of the normal reassessment period is suspended until the disclosure is made. Accordingly, the normal reassessment period begins only after a disclosure is made; from the time the disclosure is filed, the normal reassessment period will generally be the same as that otherwise provided by law.

Registration with the ”Registre des entreprises non admissibles aux contrats publics” (RENA)

A taxpayer who fails to make a disclosure when required to do so and has been assessed a penalty for non-disclosure of a specified transaction will be added to the RENA once the assessment is final (i.e. once all deadlines for objections or appeals have expired or a final determination has been made). A company that is listed on the RENA will be ineligible for government contracts for a period of five years. 

How PwC can help

These rules are complex and non-compliance could result in serious consequences. We can help you determine if these disclosure obligations apply to your business and help you meet them if they do.

^{1. Bill 42, An Act to give effect to fiscal measures announced in the Budget Speech delivered on 21 March 2019 and to various other measures, received assent on September 24, 2020.}