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Taxation law

Mandatory Disclosures of Specified Transactions

May 26th, 2021

By Martin Bédard and Hyacinthe Huguet

Under Bill 42, the Quebec government has introduced new disclosure requirements for taxpayers involved in "specified transactions".

On March 17, the first four "specified transactions" that will be subject to these new disclosure requirements were announced:

  • Avoidance of deemed disposition of trust property;
  • Payment to a non- treaty country;
  • Multiplication of the the capital gains deduction;
  • Tax attribute trading.

 

  • Avoidance of Deemed Disposition of Trust Property

This transaction essentially refers to any transaction or series of transactions by which a taxpayer or taxpayers avoid a deemed disposition of trust property, which could occur on, for example, the 21st anniversary of the trust. The transaction in question must involve a distribution of trust property, followed by the holding by another trust of that same property, substituted property or property that derives its value from the distributed property.

  • Payment to a Non-treaty Country

This operation is primarily aimed at multinationals making intra-corporate money transfers to low-tax jurisdictions.

The payment covered by this transaction must total at least one million dollars ($1M) during the same taxation year by a Quebec resident to a person with whom the resident does not deal at arm's length and who resides in a country with which Canada or Quebec does not have a tax treaty. Note that Revenu Québec has specified that a tax treaty for the purposes of the definition of this transaction does not include a tax information exchange agreement.

In addition, this transaction applies to a payment described above when it is made by a corporation that has a permanent establishment in Quebec or by a partnership all of whose members are required to file an information return with Revenu Québec in the year of the payment, or by a trust or individual resident in Quebec.

Finally, the person making the payment must deduct it in computing income to the extent of one million dollars ($1 million) or more per taxation year, unless the payment was made in consideration for the acquisition of tangible property.

  • Multiplication of the Capital Gains Deduction

This transaction addresses two situations related to the sale of eligible small business shares and the claiming of several capital gains deductions. As Revenu Québec writes:

  • "A person (generally the business owner) uses accommodators to claim multiple capital gains deductions, often through a trust, and receives all or part of the accommodators' gains.
  • The shareholder's spouse becomes a shareholder in order to claim multiple capital gains deductions by manipulating the attribution rules between spouses.” [1]

It should be noted that in the first scenario, Revenu Québec could consider that the proceeds from the sale of the shares were returned to the entrepreneur in various ways, for example if one of the beneficiaries made a transfer, a gift, a loan, or proceeded to an injection of capital into the corporation.

  • Tax Attribute Trading

The transactions target plans that avoid the rules that restrict the use of certain tax attributes on the acquisition of control of a corporation or trust between persons who are not affiliated. As Revenu Québec writes:

  • "The use of one taxpayer's tax attributes (for example, operating losses, tax credits that can be carried forward and the balance of scientific research and experimental development expenses) by another taxpayer that is not affiliated with the taxpayer immediately before the start of the series of transactions.
  • The use, resulting in a loss, of tax attributes by a corporation or trust further to its capitalization by a third party in order to carry on a new business, if there is a relationship between the capitalization and the use of the corporation's or trust's tax attributes.” [2]

An important criterion for the transaction to be covered is that one of the following two conditions is met:

  1. the taxpayer ceases to carry on the business during the transaction;
  2. the taxpayer begins to operate a new business during the transaction;

The effect of this test should be that the disclosure requirement does not apply to the acquisition by one corporation of another corporation whose business it will continue to operate.

Disclosure Procedure

The disclosure must be made using the prescribed form. The taxpayers involved in the transactions subject to the disclosure requirement and the deadlines for submitting the form vary from one transaction to another. Generally, the deadline is :

  • 60 days following the date of the transaction for Transactions 1 and 3 (Avoidance of Deemed Disposition of Trust Property and Multiplication of the Capital Gains Deduction) and
  • with the company's tax return for transactions 2 and 4 (Payment to a non-treaty country and Trade in tax attributes).

Please note that this article is only an overview of the rules related to specified transactions. Therefore, if you wish to know more about these transactions, the disclosure terms and conditions, or the penalties applicable in the event of non-compliance with these disclosure obligations, do not hesitate to contact our team of tax lawyers.

[1] https://www.revenuquebec.ca/fr/juste-pour-tous/assurer-la-conformite-fiscale/planification-fiscale-agressive/divulgation-obligatoire-de-certaines-operations/liste-des-operations-determinees/

 

[2] Ibid.