Canada’s Mandatory Disclosure Rules: What Taxpayers and Advisors Need to Know

What Are Canada’s Mandatory Disclosure Rules?

Canada’s mandatory disclosure rules require certain taxpayers, corporations, advisors, promoters, partnerships, and other persons to report specified tax transactions and uncertain tax positions to the Canada Revenue Agency (CRA).

The enhanced rules received Royal Assent on June 22, 2023 and are intended to give the CRA earlier information about transactions and tax positions that may present increased compliance risk.

The mandatory disclosure regime now includes three main categories:

• Reportable transactions;
• Notifiable transactions; and
• Reportable uncertain tax treatments.

The rules are contained primarily in sections 237.3 to 237.5 of the Income Tax Act.

For official CRA guidance, see the Mandatory Disclosure Rules overview.

Why Do the Mandatory Disclosure Rules Matter?

The rules can impose reporting obligations even where a transaction is otherwise legally permissible.

Failure to report can result in:

• Significant monetary penalties;
• Extended reassessment periods;
• Separate reporting obligations for taxpayers, advisors, and promoters;
• Additional CRA scrutiny; and
• Potential disputes about whether a transaction was required to be reported.

The rules are therefore relevant not only when filing tax returns, but also when planning or implementing transactions.

For businesses considering reorganizations or other significant transactions, see our Canadian tax planning services.

What Is a Reportable Transaction?

A reportable transaction is generally an avoidance transaction or series of transactions that meets the statutory requirements and involves at least one of three specified hallmarks.

The three hallmarks are:

• Contingent fee arrangements;
• Confidential protection; and
• Contractual protection.

The amended reportable transaction rules generally apply to transactions entered into after June 21, 2023.

What Is a Contingent Fee Arrangement?

The contingent fee hallmark can arise where an advisor or promoter’s fee is connected to the amount of a tax benefit, the success of obtaining a tax benefit, or another prescribed feature of the transaction.

Not every variable or performance-based fee automatically creates a reportable transaction.

The CRA’s administrative guidance provides examples of ordinary commercial fee arrangements that generally do not, by themselves, trigger the hallmark.

What Is Confidential Protection?

The confidential protection hallmark generally concerns arrangements where a taxpayer is prohibited from disclosing the details or structure of the transaction to another person, particularly where the restriction relates to the tax treatment or tax benefit.

Ordinary solicitor-client privilege or professional confidentiality obligations should not be confused automatically with the statutory confidential protection hallmark.

The specific terms of the arrangement must be reviewed.

What Is Contractual Protection?

Contractual protection generally involves certain protections against a failure to obtain the intended tax benefit.

Examples can include insurance, indemnities, guarantees, or similar arrangements tied to the tax result.

However, the CRA’s guidance recognizes that ordinary commercial protections do not necessarily trigger the hallmark.

For example, standard representations, warranties, indemnities, and purchase-price adjustment provisions in commercial transactions may fall outside the intended scope where they protect against ordinary business risks rather than the failure of an intended tax benefit.

Are Ordinary M&A Tax Indemnities Reportable?

Not necessarily.

Commercial transactions often contain tax representations, indemnities, covenants, and purchase-price adjustments relating to pre-closing tax liabilities.

The CRA’s guidance recognizes that ordinary commercial protections in mergers and acquisitions may not constitute contractual protection for mandatory disclosure purposes.

The analysis depends on whether the protection is designed to insure or protect the intended tax benefit rather than address ordinary commercial tax risk.

What Is a Notifiable Transaction?

A notifiable transaction is different from a reportable transaction.

Instead of being identified through generic hallmarks, a notifiable transaction is a transaction, or a transaction that is substantially similar to one, that has been specifically designated by the Minister of National Revenue with the concurrence of the Minister of Finance.

Persons who may have reporting obligations can include:

• A taxpayer who obtains or expects to obtain a tax benefit;
• A person who enters into the transaction for the taxpayer’s benefit;
• An advisor;
• A promoter; and
• Certain non-arm’s-length persons entitled to receive a fee in connection with the transaction.

Because designated transactions can change over time, taxpayers and advisors should review the CRA’s current list when considering a transaction.

When Must a Reportable or Notifiable Transaction Be Disclosed?

Reportable and notifiable transactions generally must be disclosed within 90 days.

The deadline is generally measured from the earlier of:

• The day the taxpayer or relevant person becomes contractually obligated to enter into the transaction; and
• The day the taxpayer or relevant person actually enters into the transaction.

Different reporting persons can have separate obligations.

Which Form Is Used to Report a Transaction?

Reportable and notifiable transactions are generally disclosed using Form RC312 – Reportable Transaction and Notifiable Transaction Information Return.

The CRA currently provides both online and PDF versions of Form RC312.

You can access the current form here: Form RC312.

Can Advisors and Promoters Have Separate Reporting Obligations?

Yes.

The mandatory disclosure rules can create reporting obligations for persons other than the taxpayer who receives the tax benefit.

Depending on the circumstances, reporting obligations may apply to:

• Tax advisors;
• Promoters;
• Partnerships;
• Non-arm’s-length persons connected to advisors or promoters; and
• Other persons specified by the legislation.

The existence of one person’s reporting obligation does not automatically eliminate every other person’s obligation.

However, the legislation and CRA guidance contain specific rules and exceptions that may prevent duplicative reporting in certain circumstances.

What Is a Reportable Uncertain Tax Treatment?

A reportable uncertain tax treatment is an uncertain Canadian income-tax position reflected in audited financial statements that meets the statutory requirements.

A corporation generally has a reporting obligation where all of the following apply:

• The corporation is required to file a Canadian income tax return for the taxation year;
• It has at least $50 million in assets at the end of the relevant financial year;
• The corporation or a related corporation has audited financial statements prepared under IFRS or another qualifying country-specific GAAP used for domestic public companies; and
• An uncertainty concerning the corporation’s Canadian income tax treatment is reflected in those audited financial statements.

The rule is directed at uncertain treatments involving tax payable under the Income Tax Act rather than every possible accounting or tax uncertainty.

Which Form Is Used for Reportable Uncertain Tax Treatments?

Corporations report qualifying uncertain tax treatments using Form RC3133 – Reportable Uncertain Tax Treatments Information Return.

The form is generally due by the corporation’s normal income-tax filing deadline.

You can access the current form here: Form RC3133.

What Are the Penalties for Failing to Report?

The mandatory disclosure rules contain significant penalties for failure to file required disclosures on time.

For reportable and notifiable transactions, penalties vary depending on the taxpayer and circumstances.

For example, the statutory penalty framework can include:

• Weekly penalties for taxpayers;
• Higher maximum penalties for corporations with at least $50 million in assets;
• Penalties calculated partly by reference to the tax benefit; and
• Separate penalties for advisors, promoters, and other persons subject to reporting obligations.

For reportable uncertain tax treatments, the penalty can be $2,000 per week, up to a maximum of $100,000 for each uncertain tax treatment.

Because the penalty provisions are detailed and fact-specific, the precise exposure should be reviewed under the applicable legislation rather than estimated from a general summary.

Can Failure to Report Extend the CRA Reassessment Period?

Yes.

Failure to make a required mandatory disclosure can affect when the normal reassessment period begins to run for matters relating to the undisclosed transaction or tax treatment.

The CRA indicates that where Form RC312 or RC3133 is not filed as required, the relevant reassessment period can remain open until the required disclosure is made and the applicable additional period has expired.

This can materially increase the period during which the CRA may reassess the transaction.

Is There a Due Diligence Defence?

The mandatory disclosure rules contain due diligence concepts that may be relevant to certain penalties.

Whether a person exercised sufficient due diligence depends on the specific facts, the person’s role, the information reasonably available to them, and the steps taken to comply.

The CRA has stated that due diligence will be considered based on the particular circumstances rather than through a single automatic test.

Does Solicitor-Client Privilege Still Apply?

Mandatory disclosure obligations do not eliminate solicitor-client privilege.

Where information is protected by solicitor-client privilege, the privilege should be considered separately from the statutory reporting obligation.

The legislation also contains specific provisions addressing privileged information in the mandatory disclosure context.

Businesses and advisors dealing with potentially reportable transactions should therefore distinguish between a reporting obligation and the disclosure of legally privileged communications.

What Should Businesses Do Before Completing a Significant Tax Transaction?

Mandatory disclosure should be considered before implementing a transaction rather than only when the annual tax return is prepared.

For significant transactions, businesses should consider:

• Whether one of the reportable transaction hallmarks is present;
• Whether the transaction resembles a designated notifiable transaction;
• Which parties may have separate reporting obligations;
• The applicable 90-day reporting deadline;
• Whether Form RC312 is required;
• Whether a corporation has a reportable uncertain tax treatment;
• Whether Form RC3133 is required;
• Potential penalty exposure;
• The effect of non-reporting on reassessment periods; and
• Whether legal privilege applies to particular communications.

What If the CRA Audits a Transaction That Should Have Been Reported?

If the CRA audits a transaction and raises mandatory disclosure concerns, the issues may extend beyond the underlying tax treatment.

The audit may involve:

• Whether a reporting obligation existed;
• Whether the disclosure was filed on time;
• Whether the information disclosed was complete;
• Whether penalties apply;
• Whether the reassessment period has been extended; and
• Whether the underlying tax treatment itself is correct.

If your business receives a CRA audit request, see our CRA Audit Letter: What to Do Next guide.

For legal representation, visit our CRA audit lawyers page.

Can a Mandatory Disclosure Assessment Be Challenged?

Depending on the nature of the CRA’s assessment or penalty, formal dispute rights may be available.

A taxpayer who disagrees with an assessment or penalty should review the applicable objection deadline promptly.

For information about the objection process, see our Notice of Objection (T400A) guide.

For legal representation in tax disputes, visit our CRA tax objection lawyers page.

How Our Tax Lawyers Assist With Mandatory Disclosure Rules

KR Law Firm advises businesses, corporations, individuals, and other taxpayers on Canadian tax planning and CRA disputes involving complex transactions.

Depending on the matter, our tax lawyers can assist with:

• Assessing whether a transaction is reportable;
• Reviewing reportable transaction hallmarks;
• Assessing notifiable transaction exposure;
• Reviewing uncertain tax treatment obligations;
• Advising on transaction structuring and tax planning;
• Responding to CRA audits and information requests;
• Challenging penalties and reassessments; and
• Representing taxpayers in objections and tax litigation.

Frequently Asked Questions About Canada’s Mandatory Disclosure Rules

When did the enhanced mandatory disclosure rules take effect?

The enhanced rules received Royal Assent on June 22, 2023. The revised reportable and notifiable transaction rules generally apply to transactions entered into after June 21, 2023.

What are the three mandatory disclosure regimes?

They are reportable transactions, notifiable transactions, and reportable uncertain tax treatments.

How long do I have to report a reportable transaction?

Reportable and notifiable transactions generally must be disclosed within 90 days of the earlier of entering into the transaction or becoming contractually obligated to enter into it.

What form is used for reportable and notifiable transactions?

Form RC312 is generally used to disclose reportable and notifiable transactions.

What form is used for an uncertain tax treatment?

Form RC3133 is used to report qualifying uncertain tax treatments.

Do the rules apply only to taxpayers?

No. Depending on the circumstances, advisors, promoters, partnerships, and certain other persons may also have reporting obligations.

Can failure to report extend the reassessment period?

Yes. Failure to make a required disclosure can extend the period during which the CRA may reassess matters relating to the undisclosed transaction or treatment.

Speak With a Canadian Tax Lawyer About Mandatory Disclosure

Canada’s mandatory disclosure rules can create reporting obligations before a transaction is reflected in an annual tax return, and significant penalties may apply where a required disclosure is missed.

KR Law Firm advises businesses and taxpayers on Canadian tax planning, CRA audits, objections, and disputes involving complex tax transactions.

Book a Free Consultation with one of our tax lawyers to discuss a mandatory disclosure or Canadian tax matter.

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By Kaveh Rezaei – Principal Lawyer, KR Law Firm

Disclaimer: This article provides general information only and does not constitute legal advice. Mandatory disclosure obligations are fact-specific and the applicable legislation and CRA guidance should be reviewed for each transaction.