Blake, Cassels & Graydon LLP
February 2009
Bulletin
Tax
Quebec Releases Consultation Paper on
“Aggressive Tax Planning”
John leopardi and Jean Gagnon
The Minister of Finance of Quebec (Finance Quebec)
recently released a discussion paper (the Green Paper)
on so-called “aggressive tax planning” (ATP).
The Green Paper was issued further to Finance
Quebec’s announcement in the Quebec 2008-2009
Budget Speech in March 2008 (see our March 2008
Blakes Bulletin on Tax: Quebec Budget Highlights –
Certain Measures Concerning Businesses). In that
announcement, Finance Quebec stated that a review
of Quebec tax legislation was required to address ATP.
The full text of the Green Paper is available at http://
www.finances.gouv.qc.ca.
In this bulletin, we briefly describe the proposals
referred to in the Green Paper and provide some initial
comments on these proposals.
Finance Quebec asserts that it released the Green
Paper in order to “consult” with the tax community.
The deadline for submissions was stated to be March
1, 2009, although Finance Quebec subsequently
extended the deadline to April 1, 2009.
POSSIBLE LEGISLATIVE CHANGES
Finance Quebec’s focus in the Green Paper is on
detection and deterrence of so-called aggressive
transactions. Finance Quebec asserts that the
downside risks faced by a taxpayer whose transaction
is successfully challenged are not significant enough,
and therefore proposes significant new penalties. As
well, Finance Quebec proposes both mandatory and
voluntary disclosure requirements, and an extension of
the limitation period before which a tax year becomes
statute-barred in some cases. There is also a proposal
to amend the Quebec general anti-avoidance rule
(GAAR) to “clarify” that it applies to abusive federal
and inter-provincial tax avoidance transactions.
©2009 Blake, Cassels & Graydon LLP
Montréal
Ottawa
Mandatory Early Disclosure Mechanism
Under new rules, taxpayers would be required to notify
the Quebec tax authorities, using a prescribed form
(Early Disclosure Form) in connection with certain
types of transactions. These rules are based upon
regulations under the United States Internal Revenue
Code (the U.S. Code) that require disclosure of certain
reportable transactions.
The notification would apply only where:
• a taxpayer enters into a “confidential transaction”,
i.e., where the taxpayer retains the services of
an “advisor”, under a contract that includes an
undertaking of confidentiality by the taxpayer towards
other persons or the tax administration in relation to
the transaction; or
• the remuneration of the advisor is, in whole or in
part (i) contingent upon the taxpayer obtaining a tax
benefit or depends on the amount of such tax benefit,
(ii) refundable to the taxpayer if the expected tax
benefit does not materialize, or (iii) earned only after
the relevant year becomes statute-barred.
In effect, the mandatory filing applies only to marketed
tax structures and contingent fee situations. Failure
to file the Early Disclosure Form on time results in
imposition of a penalty of between C$10,000 and
C$100,000. As well, the normal limitation period is
suspended, effectively keeping the tax year open for
reassessment indefinitely.
In view of the limited scope of the mandatory
notification – it applies only to marketed tax structures
and contingent fee arrangements – the impact of this
proposal will be relatively limited. The Early Disclosure
Form must be filed within 30 days after the transaction
“begins to be carried out”. It is not clear whether this
is intended to mean signing or closing of a transaction.
In any case, this is an extremely short time period.
In contrast, the regulations under the U.S. Code only
require reporting in a taxpayer’s tax return, after a
transaction has been undertaken.
Cont’d on Page 2
Quebec Releases Consultation Paper on “Aggressive Tax Planning”
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Cont’d from Page 1
The quantum of the penalty – C$100,000 at most –
suggests that the real target of this measure is
tax structures marketed to individuals and private
companies, rather than more complex financial and
other transactions involving substantial tax savings.
transaction to Revenue Quebec. While in theory such
disclosure might be made, it is difficult to imagine a
situation in practice where this would occur. Also, the
longer period would not apply if the Early Disclosure
Form is required and is in fact filed on a timely basis.
Changes to Quebec’s GAAR
It is proposed that the Quebec GAAR be amended so
that it would apply not only to transactions that avoid
Quebec tax, but also to transactions that avoid other
Canadian federal or provincial tax. The expansion of
the Quebec GAAR to apply to transactions that avoid
Canadian federal or provincial tax seems inappropriate
and opportunistic. The aggrieved tax jurisdiction would
be the federal or provincial jurisdiction whose taxes
were avoided. The application of the federal and/or
another provincial GAAR in addition to the Quebec
GAAR could result in double or triple taxation. This is
nothing short of a windfall to the Quebec government,
which cannot be justified on any basis.
This proposal is unfair having regard to the very
uncertain nature of GAAR as recently evidenced by the
Supreme Court of Canada decision in Lipson (see our
January 2009 Blakes Bulletin on Tax: Supreme Court
of Canada Finds Against Taxpayer in Lipson but with
Positive Comments on GAAR Approach). Moreover,
having a limitation period which is out of step with the
accepted limitation periods of the federal Income Tax
Act and the laws of other provinces will create the
potential for double taxation. This is unwarranted and
is extremely unfair.
While not entirely clear, it seems this change is
intended to be retroactive. In light of the recent OGT
Holdings case, dealing with interprovincial planning, it is
arguable that this change is not needed in any event, as
both the Quebec court and the Quebec Court of Appeal
in that case applied Quebec’s GAAR to a transaction
that arguably avoided Ontario – not Quebec – tax.
The Green Paper includes a lengthy discussion of a
possible unilateral change to GAAR to add the concept
of “economic substance”. Supportive comments from
academics are cited, but the Green Paper ultimately
rejects such a proposal on the grounds that such a
change would differentiate Quebec GAAR from federal
GAAR. Evidently, Finance Quebec does not wish to
allow substantive Quebec tax law to differ from federal
law, despite assertions to the contrary elsewhere in the
Green Paper.
Extended Reassessment Period for Quebec GAAR
Normally, a tax year becomes closed for reassessment
once four years have run since the mailing of the
original assessment for the year. Shorter periods apply
to individuals and some private companies.
Longer periods apply for transfer pricing and certain
other types of adjustments. The Green Paper proposes
a similar extended period (by an additional three years)
where Quebec GAAR is applied. This longer period
would not apply if the taxpayer elects to disclose such
©2009 Blake, Cassels & Graydon LLP
Enhanced Penalties
In a move that is likely to prove controversial, the
Green Paper proposes significant new penalties where
GAAR is successfully applied.
Where GAAR is successfully applied, the taxpayer
would face a penalty equal to 25% of the additional
tax payable. The penalty could be avoided if:
• the taxpayer discloses the transaction to Revenue
Quebec by the due date for the relevant tax return for
the year in which the transaction closes; or
• the taxpayer submits a successful defence of due
diligence.
Realistically, the likelihood that a taxpayer who
has engaged in tax planning will notify Revenue
Quebec that GAAR could apply seems remote. This
is particularly so having regard to the uncertain
nature of GAAR which is a facts and circumstances
determination. A taxpayer would not want to concede
that a transaction might give rise to so-called “abusive
tax avoidance”. In essence, therefore, the penalty
proposal is really no more than an increase in the
“downside” faced by a taxpayer whose transaction is
judged “abusive”. While it is perhaps understandable
that a tax authority would want to have such additional
weapons in its arsenal in order to deter so-called
“aggressive” planning, the suggestion that taxpayers
can avoid penalties by flagging their transactions for
Revenue Quebec seems disingenuous.
Quebec Releases Consultation Paper on “Aggressive Tax Planning”
Cont’d on Page 3
PagE 2
Bulletin
February 2009
Tax
Cont’d from Page 2
The Green Paper leaves unanswered the question of
what steps a taxpayer would need to take to comply
with the due diligence defence. It is unclear whether
the receipt of a professional opinion supporting the
taxpayer’s filing position would be sufficient.
Penalties are proposed not only for the relevant taxpayer, but also for the “promoter”. For this purpose, a
promoter of a tax structure is defined as a person who:
• markets or promotes an “abusive avoidance
transaction” or otherwise encourages its growth or
the interest it arouses – for this purpose, abusive tax
avoidance is considered to exist where the transaction is
held to be subject to Quebec GAAR;
desire to avoid uncertainty cannot justify ignoring
a provision of the [federal Income Tax Act] that is
clearly intended to apply to transactions that would
otherwise be valid on their face.
We believe such penalties are inappropriate and should
not be included in the proposed legislative changes.
Comments on Retroactive Legislation
Perhaps the most controversial portion of the Green
Paper is the allegation that the use of retroactive
legislation is a necessary and appropriate tool to combat
aggressive tax avoidance.
• has a substantial role in respect of marketing,
promotion or encouragement of an “abusive avoidance
transaction”.
One of the arguments supporting this is the suggestion
that retroactive changes merely “clarify” the rules.
Experience shows that in fact such changes go well
beyond “clarification” and retroactively impose new
taxes in circumstances where the existing legislation
clearly did not provide for it. In MIL Investments, a judge
of the Tax Court of Canada commented on retroactive
legislation as follows:
A promoter faces a penalty of 12.5% of its related
fees. This raises serious issues for taxpayers and their
advisors. Taxpayers should be able to freely seek tax
advice, and advisors should be able to provide such
advice without fear of imposition of penalties. If the
taxpayer is penalized and its advisor is a “promoter”, it
appears that promoter penalties follow automatically.
There may well be circumstances where a tax advisor
will have difficulty disproving an allegation that it is
a “promoter” without violating client confidentiality
obligations.
(See our October 2007 Blakes Bulletin on Tax:
Unsuccessful Crown Attempt to Apply GAAR to the
Canada–Luxembourg Tax Treaty for more on the MIL
Investments decision.)
• receives, directly or indirectly, consideration in
respect of marketing, promotion or encouragement of an
“abusive avoidance transaction”; and
The proposals to add penalties where GAAR is
successfully applied are clearly out of step with the
Supreme Court of Canada’s comments in Lipson, in
which the court stated:
To the extent that it may not always be obvious
whether the purpose of a provision is frustrated by
an avoidance transaction, the GAAR may introduce
a degree of uncertainty into tax planning, but such
uncertainty is inherent in all situations in which the
law must be applied to unique facts. The GAAR is
neither a penal provision nor a hammer to pound
taxpayers into submission. It is designed, in the
complex context of the [federal Income Tax Act],
to restrain abusive tax avoidance and to make sure
that the fairness of the tax system is preserved. A
©2009 Blake, Cassels & Graydon LLP
Retroactive legislation, although within the power
of Parliament is legal but undesirable… The
inappropriateness of reassessing taxpayers who
completed transactions in accordance with the law
in force at the time of those transactions without
any expectation of adverse retroactive effect is selfevident.
OBSERVATIONS
The Green Paper proposes to give Revenue Quebec
new statutory tools to deal with so–called “abusive tax
avoidance transactions”. These transactions are referred
to as transactions that comply with the letter of the tax
law but allegedly abuse the “object, spirit and purpose”
of the tax legislation.
The extensive discussion in the Green Paper ignores
the most serious problem with this formulation – which
is the fact that “abuse” is an extremely subjective and
uncertain concept. Indeed, in the recent Lipson case in
the Supreme Court of Canada, three distinct views
were taken by different members of the court on this
Quebec Releases Consultation Paper on “Aggressive Tax Planning”
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PagE 3
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Tax
Cont’d from Page 3
question. Unfortunately, the rigour of the court’s
analysis in this area is often questionable. In many cases
the determination of “abuse” arguably boils down to
little more than a “smell test”. The Green Paper states
that there must be “clear abuse” in order for GAAR to
apply, that “benefit of the doubt” goes to the taxpayer
and, for that reason, tax authorities are “very cautious”
in applying the GAAR. This remains to be seen. The
imposition of harsh new penalties would encourage the
tax authority to challenge a wider range of transactions
knowing that the taxpayer will be more likely to settle
where the downside of losing has been increased.
The sweeping nature of the proposals may explain
why Finance Quebec has invited the tax community
to provide comments. There can be no doubt that
these provocative proposals will result in considerable
comment. Undoubtedly, the other Canadian tax
authorities are monitoring the developments with
interest. Even if the other authorities do not adopt
the same approach, if Quebec goes ahead, the other
authorities will undoubtedly be beneficiaries through
their existing exchange of information arrangements.
If you would like more information concerning the Green
Paper, we invite you to contact any of the Blakes tax
lawyers listed on the following page.
©2009 Blake, Cassels & Graydon LLP
Quebec Releases Consultation Paper on “Aggressive Tax Planning”
PagE 4
Bulletin
February 2009
Tax
Lawyers from Blakes Tax Group include:
Montréal
Jean Gagnon
John Leopardi
514-982-5025
514-982-5030
[email protected]
[email protected]
Toronto
Bryan Bailey
Robert Kreklewich
Janice McCart
Kathleen Penny
Ron Richler
David Spiro
Paul Stepak
Paul Tamaki
Jeffrey Trossman
Chris Van Loan
416-863-2297
416-863-3278
416-863-2669
416-863-3898
416-863-3854
416-863-2755
416-863-2457
416-863-2697
416-863-4290
416-863-2687
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Calgary
Edmund Gill
Ron Mar
Edward Rowe
Wanda Rumball
Wally Shaw
403-260-9772
403-260-9704
403-260-9798
403-260-9794
403-260-9766
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Vancouver
Robert Kopstein
Bill Maclagan
Janette Pantry
Bruce Sinclair
Kevin Zimka
604-631-3317
604-631-3336
604-631-4163
604-631-3382
604-631-3363
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
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