Canada

Quebec government adds to its arsenal against aggressive tax planning

TAX ALERT  | 

Over the last decade, Quebec has been actively engaged in the management, detection, and obstruction of aggressive tax-avoidance schemes. In 2009, a broad legislative framework was introduced to curb aggressive tax planning in Quebec. The rules have since been significantly revised and expanded in furtherance of this objective.

For example, in the 2019 budget, the Quebec government undertook to implement several tax fairness measures, including rules that would block businesses’ involvement in public contracts in certain circumstances. In this regard, on September 16, 2019, Bill 37 - an act mainly to establish the Centre d’acquisitions gouvernementales and Infrastructures technologiques Québec - was introduced. This Bill will restrict taxpayers’ abilities to enter into contracts with public bodies if they have been assessed with general anti-avoidance rule (GAAR)-based penalties.

Anti-avoidance legislative framework in Quebec

The Quebec Taxation Act (QTA) has its own GAAR, the wording of which is virtually identical to the federal GAAR. See our previous Tax Alert for a brief overview of the federal GAAR. However, Quebec has taken additional steps to address the challenges that aggressive tax planning has created for the provincial treasury. First introduced in 2009 and substantially modified over the years, the anti-avoidance legislative framework is intended to improve tax fairness and provide Revenu Quebec with comprehensive information pertaining to perceived aggressive tax planning.

One major feature of the anti-avoidance regime is disclosure. Revenu Quebec requires taxpayers to disclose transactions if they bear certain hallmarks. Taxpayers that carry out a confidential transaction, a transaction involving conditional remuneration, a transaction involving contractual coverage, or other designated transactions (as prescribed by the relevant rules), must make a ‘mandatory disclosure’ of any such transaction to Revenu Quebec. Taxpayers may also choose to make a ‘preventive disclosure’ of any transaction entered into.

If a transaction has not been disclosed and is subject to a Quebec GAAR challenge, Revenu Quebec may issue a GAAR-based assessment beyond the normal reassessment period and apply a GAAR-based penalty. Quebec’s GAAR-based penalties do not have a federal counterpart. These penalties are: 1) a penalty amounting to 50 per cent of the amount of the tax benefit denied when a GAAR-based reassessment is issued, and 2) a penalty imposed on a promoter as defined in the QTA of a transaction in respect of which a GAAR-based assessment is issued 100 per cent of the fees paid to the promoter.

Breakdown of Bill 37

The Bill proposes myriad amendments, most of which are related to the governance of public bodies. Specifically, the Bill unveils amendments to provincial legislation, the Tax Administration Act and the Act respecting Contracting by Public Bodies.

Under the proposals, the public procurement authority may record certain persons involved with transactions in respect of which a GAAR-based penalty under the QTA is imposed, in the ‘Registre des entreprises non admissibles aux contrats publics’ (RENA).

The persons targeted by the proposals include:

  • A business on which a QTA GAAR-based penalty has been assessed
  • Promoters of the violating transactions such as persons or partnerships who commercialize, promote in any way, support or receive directly or indirectly any consideration therefore
  • Businesses related to a person on whom a GAAR-based penalty has been applied

The inscription to RENA lasts five years. Thus, the targeted persons above will not be eligible to enter into public contracts for five years from the date of recording in the RENA. Moreover, the penalties imposed will be taken into account by the ‘Autorité des marchés publics’ (AMP) when it comes to deciding whether or not to authorize a business to enter into contracts with a public body. That is, a taxpayer’s prior GAAR-based assessment will be taken into consideration, even beyond the five year registration period in RENA, in the AMP’s authorization process for entering into public contracts.

Notwithstanding the above, taxpayers may be exempted from the QTA’s GAAR-based penalty and from being listed in the RENA if the taxpayer makes a preventive disclosure to Revenu Quebec within 60 days of the passage of the Bill. The Bill does not specify the date on which the GAAR-related provisions come into effect.

Doubling down on anti-avoidance

The Bill sends an unambiguous signal to taxpayers that Quebec intends to continue its campaign against aggressive tax planning. Beyond pecuniary penalties, the consequences of engaging in transactions subject to the provincial GAAR could extend to punitive, long-term bans from entering into public contracts.

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