Revenu Québec Unveils the Transactions That Must Now Be Disclosed

On March 17, 2021, the Québec Minister of Finance published the Mandatory Transaction Disclosure Regulation (the “Regulation”), which provides for implementing mandatory disclosure requirements for certain transactions.

Disclosure is mandatory for a taxpayer if the transaction is a specified transaction, i.e., a transaction or series of transactions in which the form and substance of the facts of the taxpayer or the partnership are materially similar to the form and substance of the facts of a determined transaction set forth by the Minister.

What are the Determined Transactions?

The Québec government has identified the first four transactions that will now be subject to mandatory disclosure. These transactions are the following:

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

Avoidance of Deemed Disposal of Trust Property

The first transaction involves Québec resident trusts that dispose of capital property or land included in the inventory of a business it carries on for less than the fair market value and, as a result of such disposal, either the disposed property, another property whose fair market value is derived from the disposed property, or a property substituted for the disposed property is held by another trust, directly or indirectly.

This transaction involves certain transactions that circumvent the application of the deemed disposition of capital property on the 21^st anniversary of a trust, thereby deferring the taxation of the accrued gain on the property held by the trust.

The trust that is a party to this determined transaction must disclose it by the later of the following dates:

• 60 days after the distribution of the property; or
• 120 days after the publication of the determined transaction in the Gazette officielle du Québec, i.e. July 15, 2021.

Payment to a Non-Treaty Country

The second transaction generally concerns payments totalling at least $1,000,000 made by a taxpayer resident in Québec, a corporation that has an establishment in Québec or a partnership of which each member is required to file an information return in Québec for the fiscal period in which the transaction occurs to an entity with which the taxpayer or the partnership does not deal at arm's length and is resident in a country with which Québec or Canada does not have a country tax treaty at that time.

This transaction involves transactions that reduce an entity's taxable income by paying amounts to entities located outside Canada.

The obligation to disclose the determined transaction rests with the individual, the trust, the corporation or partnership members that made the payment(s). Disclosure must be made by the later of the following dates:

• The taxpayer's applicable filing due date; or
• 120 days after the publication of the determined transaction in the Gazette officielle du Québec, i.e. July 15, 2021.

Multiplication of the Capital Gains Deduction

The third determined transaction concerns transactions used to multiply the capital gains deduction (“CGD”). In general, it covers the following two types of transactions:

• a person (generally the entrepreneur) uses accommodators to multiply the benefit of the CGD through a trust, and has some or all of the accommodators' gain returned to him;
• the shareholder's spouse is brought into the shareholding to multiply the CGD claimed by manipulating the spousal attribution rules.

This transaction is intended to cover transactions that multiply the CGD among several persons, in particular by transferring shares to the spouse of the person operating the business.

The obligation to disclose such a transaction to Revenu Québec is incumbent upon an individual participating in the transaction.

The disclosure must be made in the case of a transaction covered by the first situation above, on the latest of the following dates

• 60 days of the later of the day of disposal of the eligible shares or the transfer or loan of the proceeds of disposition; or
• 120 days after the publication of the determined transaction in the Gazette officielle du Québec, i.e. July 15, 2021.

The disclosure must be made in the case of a transaction covered by the second situation above, on the later of:

• 60 days after the transfer of the eligible shares to the spouse; or
• 120 days after the publication of the determined transaction in the Gazette officielle du Québec, i.e. July 15, 2021.

Tax Attribute Trading

The fourth transaction concerns the following situations:

• The use of tax attributes of a taxpayer by another taxpayer that is not affiliated with the first taxpayer immediately before the beginning of the series of transactions; or
• The use of tax attributes by a corporation or trust as a result of its capitalization by a third party, including to carry on a new business, where there is a connection between that capitalization and the use of the tax attributes of the corporation or trust.

This transaction is intended to avoid the application of the rules restricting the use of tax attributes following an acquisition of control of a corporation or trust between non-affiliated persons.

The obligation to disclose a transaction described in the first case above rests with the taxpayer using the tax attributes, while the obligation to disclose a transaction described in the second case above rests with the loss corporation or trust whose tax attributes are used.

The disclosure must be made by the later of the following dates:

• the filing due date applicable to the taxpayer who used the tax attributes; or
• 120 days after the publication of the specified transaction in the Gazette officielle du Québec, i.e. July 15, 2021.

How Do I Make the Disclosure and When?

The disclosure of a determined transaction must be made using form TP-1079.DI, Mandatory or Preventive Disclosure of Tax Planning.

The disclosure form must be filed by the latest of the following dates:

• 60 days after the day determined by the Regulation; or
• 120 days following the date of publication of the determined transaction in the Gazette officielle du Québec, i.e. July 15, 2021.

What are the Consequences of Failing to Disclose?

Taxpayers or partnerships that fail to disclose incur two cumulative penalties:

• A penalty of $10,000 and an additional penalty of $1,000 per day, up to $100,000;
• A penalty of 50% of the tax benefit.

Taxpayers or members of the partnership that conducted the designated transaction are also subject to the following consequences:

• An extension of the period during which Revenu Québec may issue a reassessment based on the application of the general anti-avoidance rule (GAAR); and
• A suspension of the limitation period for the undisclosed designated transaction until the prescribed form is filed.

Advisors and promoters who implement these transactions and fail to disclose are also subject to the following cumulative penalties:

• A penalty of $10,000 and an additional penalty of $1,000 per day, up to a maximum of $100,000;
• A penalty equal to the fees received or receivable for implementing the transaction.

If you have any questions, please do not hesitate to contact the Taxation team.