Quebec Hikes GAAR-Based Penalties

In its 256-page Tax Havens: Tax Fairness Action Plan and the associated Information Bulletin 2017-10, both released in November 2017, the Quebec government announced several actions, effective February 1, 2018. Most notably, penalties imposed on taxpayers to whom GAAR applies will be doubled, and penalties imposed on promoters of transactions in respect of which a GAAR-based assessment is issued will be multiplied eightfold. Neither of these GAAR-based consequences has a counterpart at the federal level; for example, a taxpayer subject to the federal GAAR merely has to pay the increased tax without any special penalty. Further, the government plans to stigmatize firms involved in aggressive tax planning in a new way: beginning at some unspecified date, they will be unable to bid for public contracts. This action creates substantial uncertainty and will need to be taken into account when a taxpayer is faced with a possible GAAR-based assessment.

Since 2009, Quebec has had two GAAR-based penalties:
  1. a penalty amounting to 25 percent of the amount of the tax benefit denied when a GAAR-based reassessment is issued (section 1079.13.1 of the Quebec Taxation Act [QTA]), and

  2. a penalty imposed on a promoter (as defined in QTA section 1079.9) of a transaction in respect of which a GAAR-based assessment is issued of 12.5 percent of the fees paid to the promoter (QTA section 1079.13.2).

These penalties apply to any person liable to pay tax in the province. Under the new strategy, the penalty imposed on the taxpayer rises from 25 percent to 50 percent of the tax benefit denied; the penalty imposed on the promoter rises from 12.5 percent to 100 percent of the fees paid. These measures will apply to transactions carried out on or after November 10, 2017, but will not apply to a transaction that is part of a series of transactions that began before November 10, 2017 and was completed before February 1, 2018.

The government also announced that the limitation period for Revenu Québec to issue reassessments against the taxpayer is being extended in certain GAAR-related circumstances. In fact, the minister may apply to a judge of the Court of Quebec for authorization to send a person a formal demand for information concerning one or more unnamed persons. When a taxpayer is the subject of a demand, the limitation period to issue a GAAR-based assessment is suspended. This extension will apply in cases where an application for the authorization of the demand was made to a judge of the Court of Quebec after November 10, 2017.

An additional noteworthy action was announced in the tax fairness action plan involving government procurement. The government stated that it plans to add new exclusion criteria for the issuance of authorizations to contract with the Quebec government:
[T]axpayers who have carried out a transaction or series of transactions resulting in final assessments based on the general anti-avoidance rule will be unable to obtain authorization from the Autorité des marchés financiers to bid for public contracts and will be listed in the Register of Enterprises Ineligible for Public Contracts.
This action will also apply to the promoter of such a transaction or series of transactions.

The new measures are part of the government's ongoing concern with respect to aggressive tax planning. In 2009, the minister of finance released a working paper explaining that aggressive tax planning was of serious concern for the Quebec tax authorities and demonstrating that among the factors leading to its proliferation were a favourable risk-reward ratio for taxpayers and the wide availability of off-the-shelf tax plans.

However, the effectiveness of the measures announced is open to question. In fact, GAAR is one tool among others to counter aggressive tax planning, and a 25 percent penalty on GAAR-based assessments has been applicable since 2009. Is it reasonable to expect that doubling the amount of the penalty will increase the deterrence effect?

Romy-Alexandra Laliberté
Deloitte Tax Law LLP, Montreal

Canadian Tax Focus
Volume 8, Number 1, February 2018
©2018, Canadian Tax Foundation