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At Revenu Québec’s round table of the APFF’s 2023 congress a question has been asked with regards to a gift of shares by a father to his son in relation with the mandatory disclosure to Revenu Québec of a specified transaction.

Revenu Québec confirmed then that they are in the opinion that a series of transactions involving a donation, as described in the submitted scenario, is significantly similar in form and substance to the facts of the determined transaction 3. Consequently, the taxpayer who gives shares of a private corporation and uses its capital gain exemption would be required to disclose this transaction to the minister.

Yes, Revenu Québec had confirmed. Taxpayers transferring shares of a private corporation while utilizing their capital gains exemption must be aware that this transaction requires disclosure to the minister.

The legal framework beyond Revenu Québec’s opinion is the following. The first paragraph of section 1079.8.6.2 of the QTA provides that a taxpayer who carries out a specified transaction or who is a member of a partnership which carries out such a transaction must, in an information return filed in accordance with the first paragraph of section 1079.8.9 of the QTA, and within the time provided for in section 1079.8.10.1 of the QTA, disclose this transaction to the Minister. The first paragraph of section 1079.8.1 of the QTA provides that the expression “specified transaction” carried out by a taxpayer, or a partnership means a transaction whose form and substance of facts specific to the taxpayer or to partnership are significantly similar to the form and substance of the facts of a transaction determined by the Minister and published in the Gazette officielle du Québec.

Since June 29, 2022, a transaction that includes the following facts is hereby determined by the Minister as the specified transaction no 3:

a. an individual subject to tax under Part I of the Act, a trust or a partnership disposes of a share of the capital stock of a Canadian-controlled private corporation;

b. the share is a qualified small business corporation share;

c. in respect of the disposition, the individual deducts an amount under section 726.7 of the Act in computing taxable income for a taxation year; and

d. either of the following conditions is met: 

i. the individual transfers or loans, directly or indirectly, in any manner whatever, including by means of a trust or a corporation, or by repayment of existing indebtedness, an amount that may reasonably be considered to be, directly or indirectly, part or all of the proceeds of the disposition of the share, to either

ii. a particular person that is a shareholder of the corporation referred to in subparagraph a) or would be such a shareholder if section 21.18 of the Act applied and were read without reference to “specified”, wherever that term appears, or that was previously such a shareholder of the corporation;

iii. a person that does not deal at arm's length with the particular person; or

iv. the individual acquired a share of a person who is the individual's spouse as part of a transfer referred to in section 454 of the Act and a valid election under the second paragraph of that section 454 was made by the individual's spouse, with the result that the provisions of section 454 do not apply to the transfer.

For the purposes of the first paragraph, an individual who expressly or implicitly undertook to transfer or loan part or all of the proceeds of the disposition of a share is deemed to have made the transfer or loan at the time of the undertaking.

(…)

However, there could be a way out. Does the series of transactions involve the gift is an excluded transaction? An excluded transaction is a transaction or series of transactions that is excluded if Revenu Québec considers that it does not fall under the general definition of a determined transaction or is excluded from its application. A series of transactions is excluded only if the entire series is covered by the exclusion: Determined Transactions | Revenu Québec (revenuquebec.ca).

Finally, important penalties apply if the taxpayer does not disclose the gift of shares.

Pursuant to 1079.8.13.1 QTA if, in relation to a specified transaction to which section 1079.8.6.2 applies and that is carried out by a taxpayer and the taxpayer fails to send the disclosure form, the taxpayer, as the case may be, incurs a penalty of up to $100,000 comprising a penalty of $10,000 and an additional penalty of $1,000 per day, as of the second day, for every day the failure continues. In the case of a failure, the taxpayer or the partnership that carries out the specified transaction also incurs a penalty equal to 50% of the tax benefit. Finally, if the duly completed copy of form TP-1079.OD is not filed by the deadline, an additional three years will be added to the prescribed period during which Revenu Québec can issue a reassessment under the general anti-avoidance rule.