Notifiable and Reportable Transactions: Canadian Tax Seminar

Since June 21, 2023 a single hallmark triggers reporting under section 237.3, and a contingent fee is the most common one. Work through notifiable and reportable transactions, RUTT, questioning under oath, notices of non-compliance, flipped property, and short-term rentals.

Michael Cadesky FCPA, FCA, FTIHK, CTA, TEP (Emeritus)
Hugh Woolley CPA, CA, TEP
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2.0h Verifiable CPD
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Michael Cadesky and Hugh Woolley

CRA Audit Powers and Mandatory Disclosure: Sections 237.3, 237.4 and 237.5, Questioning Under Oath, Notices of Non-Compliance, Flipped Property, and Short-Term Rentals

A contingent fee on a plan that worked is now a single hallmark under section 237.3, and the reporting obligation falls on the advisor who gave the advice. Miss it and the penalty runs to six figures, the reassessment period never starts, and the trigger was the wording of your own engagement letter and bill.

CRA no longer has to ask nicely. Oral answers can be compelled, questions can be put under oath, information that has never been written down can be demanded, and a notice of non-compliance suspends the reassessment clock while a daily penalty accrues. The disclosure regimes run in parallel: the obligation attaches to the advisor and the promoter, not only the client, and the deadline is 90 days from entering the transaction, not from filing.
  • check_circle Section 237.3 reportable transactions. The move from two hallmarks to one, why a contingent fee is the common trigger, what CRA excludes as value billing and contractual protection, and the engagement letter and billing changes that follow.
  • check_circle Section 237.4 notifiable transactions. The five designated transactions, the substantially similar test, the 90-day deadline running from the transaction rather than the filing, and the separate obligations on advisor, promoter, and client.
  • check_circle Section 231.41 questioning under oath and section 231.9 notices of non-compliance. The 2024 mechanism that suspends the normal reassessment period, the administrative review and Federal Court timelines, and the compliance order penalty tied to tax payable.
  • check_circle Subsections 231.1(1) and 231.2(1) to (3). What CRA can demand from the taxpayer, what it can demand from accountants, lawyers, and banks as third party record keepers, when prior judicial authorization is required for unnamed persons, and why information that was never documented can still be required.
  • check_circle Subsections 12(12) to 12(14) flipped property and section 69.7 short-term rentals. The 365-day hold test and its exceptions, why the rule reaches rentals, trusts, partnerships and corporations, and the municipal compliance failure that denies every expense against the rental income.
  • check_circle The Canadian Entrepreneurs' Incentive. The excluded business list, the 5% ownership and 24-month holding tests, the three-year active participation requirement, and the butterfly restriction that mirrors the capital gains exemption rule.

What You'll Learn

Thirteen sections, in the order the seminar builds them. The three disclosure regimes first, then what CRA can compel and how that changed, then the interview and assessment mechanics, then the residential property rules and the new incentive.

expand_more Section 237.4 Notifiable Transactions: The Five Designated Transactions, the 90-Day Deadline, and Who Must Report

A reporting obligation that attaches to the advisor personally, on a clock that starts at the transaction.

  • What is caught Transactions designated by the government as abusive and posted on the CRA website, with five currently listed.
  • The substantially similar test The obligation is triggered by the same transaction or something substantially similar, which is what makes the review exercise necessary rather than optional.
  • The deadline Notification within 90 days of the earlier of entering into the transaction and the obligation to carry it out, not on filing the return.
  • Who reports The advisor who gives the advice, the promoter who receives a fee, the client who gets the tax benefit, and a person who enters into the transaction for the benefit of the person expecting the benefit.
  • The exception Solicitor-client privilege.
  • The five posted transactions Partnership hedge or commodity straddles; plans to avoid the 21-year rule involving corporations owned by trusts or non-residents; certain debt forgiveness and bankruptcy arrangements; tax loss trading that avoids the acquisition of control rules; and back-to-back arrangements avoiding thin capitalization or non-resident withholding tax.
  • The penalty for an advisor A fixed amount plus the fee charged plus a daily amount capped at 100 days, which takes the total to six figures plus the fee.
  • Staying current The list is maintained on the CRA website with an email notification service, which is the only practical way to know a new transaction has been added.
  • Effective date Transactions entered into after June 21, 2023, with the first reporting due 90 days after Royal Assent.
expand_more The 21-Year Rule Notifiable Transactions: Three Versions, Subsection 104(5.8), and Falling In Accidentally

The one designated transaction that ordinary owner-manager files can land on without anyone intending it.

  • Why this one matters The trust transactions are the most likely of the five to be relevant to general practice, and it is possible to fall into them accidentally.
  • The underlying concern Moving an accrued capital gain indirectly into a new trust with a fresh 21-year period.
  • The existing anti-avoidance rule Subsection 104(5.8), which deems the new trust to have its 21st anniversary on the same date as the old trust, but which has limited scope.
  • Version one A new trust owns the shares of a holding company, the holding company is or becomes a beneficiary of the old trust, and the old trust distributes property to the holding company rather than to the new trust directly.
  • Why that structure works around the rule Subsection 104(5.8) applies to property distributed to the new trust, and the distribution here goes to a corporation.
  • Version two Non-residents are beneficiaries of the old trust, a holding company is or becomes a beneficiary, and the holding company is owned wholly or in part by non-residents.
  • Version three The further variation covered in the session, and the common structural features that link all three.
  • CRA's stated position An intention to apply GAAR to these arrangements independently of the reporting obligation.
  • The action required Reviewing existing trust and holding company structures against the posted list rather than waiting for a new plan to be proposed.
expand_more Section 237.3 Reportable Transactions: The Move From Two Hallmarks to One, Contingent Fees, Confidentiality, and Contractual Protection

The regime that reaches ordinary planning work because the trigger is how the engagement was priced.

  • The threshold question An avoidance transaction, meaning one of the main purposes is to obtain a tax benefit.
  • The three hallmarks A fee contingent on the tax savings, disclosure prohibited by the terms of the engagement, and a guarantee of the result or an indemnity if it is not achieved.
  • What changed Meeting two of the three used to trigger reporting; now any one is enough.
  • Why it was tightened Very few disclosures were made under the two-hallmark test.
  • The most common trigger The contingent fee, frequently accompanied by a confidentiality requirement or a guarantee of the outcome.
  • The penalty The same significant penalty that applies to notifiable transactions.
  • A ruling is not an answer Obtaining an advance ruling does not remove the reporting requirement.
  • The uncomfortable case Doing good work and billing contingently on the result, for example on a sale where the exemption was multiplied through a trust structure organized years earlier.
expand_more What CRA Excludes, and the Engagement Letter, Billing, and Form RC312 Action Points

The exclusions are administrative guidance rather than legislation, which is what makes the wording of your own documents the exposure.

  • Value billing excluded A fee based on value rather than time, provided it is not based on the tax savings.
  • What a value bill may be based on The training and experience of the people engaged, time expended, the degree of risk and responsibility, the priority and importance of the work, and the value of the work to the client, but never the value of the tax benefit.
  • Other excluded fees Contingent fees in an R&D tax credit practice, since the main purpose of the research was scientific, and contingent fees for winning an audit or appeal where the person was not involved in the plan itself.
  • Audit insurance Likely outside the rules on routine compliance work, with a policy written specifically to guarantee a transaction result treated differently.
  • Contractual protection excluded Normal professional liability insurance, a limitation of liability clause tied to negligence claims, standard representations and warranties between purchaser and vendor, and standard price adjustment clauses.
  • Engagement letter action Review the terms and remove any prohibition on disclosing a plan, which can be left as a suggestion rather than a requirement.
  • Billing action Separate chargeout rates for tax compliance and tax planning, and care in how a bill is worded, since careless wording alone can make a bill look tax-result based.
  • The form Form RC312, with disclosure the safer course where there is doubt, and reporting is not an admission that anything is wrong.
  • The consequence of not filing The normal reassessment period is paused and begins only on filing, so the year never closes.
expand_more Section 237.5 Reportable Uncertain Tax Treatments: The IFRS and Asset Thresholds, Form RC3133, and the Weekly Penalty

Narrow in application and vague in definition, which is a difficult combination for a firm with an audit practice.

  • The four conditions Audited financial statements prepared under IFRS, a carrying value of assets of $50 million or more, a T2 filed, and an uncertain tax treatment reflected in the statements or notes.
  • Who is outside it Trusts, individuals, and foreign corporations unless they carry on business in Canada and file a T2.
  • What an uncertain tax treatment is Uncertainty as to the treatment reflected in the statements or notes, rather than the ordinary differences that always arise between accounting income and income for tax purposes.
  • Why the definition is a problem The rules remain vague despite CRA guidance, so the judgment falls to the preparer.
  • The form Form RC3133, filed with the T2.
  • The penalty Levied on the corporation rather than on advisors, at $2,000 per week to a maximum of $100,000 for each uncertain tax position not reported.
  • The practical question for auditors Whether a tax cushion recorded in the statements is itself evidence of an uncertain tax treatment.
  • Effective from 2023 onward.
expand_more Subsections 231.1(1), 231.2(1) to (3), and Section 231.7: What CRA Can Demand, From Whom, and With What Authorization

The provisions that have been litigated repeatedly, and amended each time CRA lost.

  • The core provisions Subsection 231.1(1) on audit information, subsection 231.2(1) on requirements, subsections 231.2(2) and (3) on third parties, and section 231.7 on compliance orders.
  • The background Successive funding commitments directed at business intelligence infrastructure and risk assessment systems targeting international and aggressive planning files.
  • What that looks like in practice Extensive information letters on short timelines followed by long silence, a wide net cast by risk assessment models, and very little scope to withhold what is asked for.
  • The oral answer question Litigation initially held that the audit power did not compel oral answers, on the basis that it amounted to a pre-emptive discovery outside the Tax Court procedures.
  • The books and records question A document was held to extend beyond a record that can be physically inspected, and to include money, a security, and any record.
  • Inadequate records Where the taxpayer failed to keep adequate books and records under subsection 230(1), the audit power reaches what should have been in them.
  • Information that does not exist CRA can require information that has never been documented, so a taxpayer with no corporate chart or no margin analysis by product line may be required to prepare one.
  • Third party record keepers Section 231.2 operates beyond the audit context and reaches banks, accountants, and lawyers, subject to solicitor-client privilege.
  • Unnamed persons Prior judicial authorization under subsections 231.2(2) and (3) is required where unnamed persons are already being audited or targeted, with unnamed persons not to be conflated with unknown persons.
  • Physical attendance CRA is not required to attend the place of business to request books and records.
  • Burden and reasonableness The taxpayer carries the burden on reasonableness while CRA need only establish objective reasonableness, and the taxpayer must make reasonable efforts to obtain information held by third parties.
expand_more The December 2022 Amendments and the 2024 Budget Changes: Section 231.41 Questioning Under Oath and Section 231.9 Notices of Non-Compliance

The legislative response that reversed the taxpayer wins, and the new mechanism that stops the clock.

  • The December 15, 2022 amendments Subsection 231.1(1) expanded so CRA may examine any document of the taxpayer or of any other person.
  • The reversal on oral answers CRA given the power to require any person to answer questions in writing, orally, or in any form specified, which puts the taxpayer on the spot.
  • Section 231.41 A requirement or notice under section 231.1, 231.2, or 231.6 may require answers under oath or by affidavit, with the penalty of perjury attaching.
  • Section 231.9 CRA may at any time send or serve a notice of non-compliance where it determines a person has not complied in full or in part under subsection 231.1(2), 231.2(1), or 231.6(2), and the notice must state the manner of the failure.
  • The effect on the clock The normal reassessment period is suspended while a notice of non-compliance is outstanding.
  • The review path An administrative review requested within 90 days of the notice, a CRA decision to confirm, vary, or vacate within 180 days of the request, and an application to a judge of the Federal Court within 90 days of that decision.
  • When the court will set it aside Where the notice was unreasonable, or where the taxpayer had done everything reasonably necessary to comply.
  • The daily penalty $50 per day to a maximum of $25,000 during the period of non-compliance, which does not apply where the notice is vacated by CRA or the court.
  • Compliance orders on foreign information Section 231.7 available for a failure to provide foreign based information under section 231.6, sought either before or after a notice of non-compliance.
  • The compliance order penalty 10% of the tax payable for every taxation year to which the order relates, applying only where tax exceeds $50,000 in at least one year, which gives CRA leverage well beyond the information itself.
expand_more Discovery and Document Privilege: Why an Accountant's Technical Memo Is Disclosable and a Lawyer's Is Not

Relevance on discovery is broader than the reassessment, which is the practical argument for where analysis gets written.

  • The scope of pre-trial disclosure Very broad, measured by the relevance criteria rather than by what the reassessment actually raised.
  • What that reaches Technical memos prepared by the accountant analysing an issue, including issues not covered in the reassessment.
  • The arguments that failed That the memo was irrelevant because the assessing provision was not discussed in it, and that the Minister already knew about the transaction.
  • The correspondence too All correspondence related to the memo required to be disclosed alongside it.
  • The exclusion Legal privilege is a specific exclusion from the broad disclosure rules, which lawyers may hold over their documents and accountants may not.
  • The practical consequence Where the analysis is genuinely sensitive, who prepares it and under what retainer is a decision made at the start of the file, not once litigation begins.
expand_more CRA Interviews: Leading Questions, Inadvertent Admissions of Intent, and Preparing the Client

Now that oral answers can be compelled and taken under oath, the wording of an answer is a tax position.

  • The risk Leading or surprising questions put to an unprepared taxpayer who cannot be expected to know what sits behind them.
  • How an answer becomes an admission Adopting the questioner's characterization of a transaction can amount to an admission of an adventure in the nature of trade, even where the answer was given naively.
  • The intent question Asked why a trust exists, an answer framed around income splitting and multiplying the exemption reads very differently from an answer framed around benefiting the beneficiaries, and both may be true.
  • Why it is hard to undo An inadvertent admission of fact or intent may not be correct but is difficult to reverse afterward.
  • Under oath The stakes rise where the questions and answers are given under oath.
  • The four actions Do not let the client answer without a professional present, defer on abstract or difficult questions and respond in writing later, rephrase the question before answering it, and prepare the client in advance on the likely issues.
  • When to escalate Bringing in a tax specialist, or a tax lawyer familiar with litigation, depending on what is at stake.
expand_more Electronic Assessment Through the CRA Account: Missed Correspondence and Blown Objection Deadlines

A consent given once, and a reassessment nobody sees until collections calls.

  • The mechanism Where the taxpayer has consented, CRA may send an assessment or reassessment electronically by posting it to the taxpayer's account.
  • How the sequence usually runs A follow-up enquiry that is never seen, for example to substantiate donations or foreign tax credits, the items disallowed, and the reassessment posted electronically.
  • The consequence The deadline to object can pass before the taxpayer is aware, with the reassessment first discovered when collections calls for payment.
  • The remedy and its cost Leave to file a late objection, almost always granted, but a nuisance that should not have arisen.
  • The two actions Check activity in the taxpayer's account rather than waiting for mail, and consider revoking consent to electronic communication where correspondence is likely to be missed.
expand_more Subsections 12(12) to 12(14) Flipped Property: The 365-Day Hold Test, the Exceptions, and Why It Is Not a Principal Residence Rule

A bright line rule sitting on top of the adventure in the nature of trade analysis, not in place of it.

  • What is caught A housing unit or a right to acquire a housing unit, that is capital property, located in Canada.
  • The test A 365-day hold, failing which the property is flipped property unless an exception applies and the gain is taxed as regular income.
  • The scope most practitioners underestimate The rule is not limited to a principal residence, and it applies to trusts, partnerships, and corporations as well as individuals, so a rental property held under a year is caught.
  • What is outside it Property that is not capital property because it is inventory or already an adventure in the nature of trade, and foreign real estate.
  • The two ways it applies Ownership of the property, and assignment of an offer to purchase.
  • Where the assignment still fails Clearing 365 days on a contract does not settle the matter, since the assignment may itself be an adventure in the nature of trade, and the principal residence exemption is unavailable because the property was never occupied.
  • The exceptions by circumstance Death of the taxpayer or a related person, a related person joining the household, and the taxpayer joining another related household.
  • Eligible relocation A move due to a change of work location meeting the 40 kilometre distance test, which is the exception a genuine job relocation turns on.
  • The rest of the list The further exceptions covered in the session, and why many clients will attempt to fit within one.
  • The planning point Where a sale falls just inside the period, deferring closing past day 365 preserves the capital gain characterization, subject to the trade analysis.
expand_more Section 69.7 Short-Term Rentals: The 90-Day Definition, Municipal Compliance, and the Complete Denial of Expenses

Income stays taxable, deductions disappear, and the determining fact is a municipal licence rather than anything in the Income Tax Act.

  • The rule Where a short-term residential rental is non-compliant, the rental income remains taxable and no expenses are allowed against it.
  • The definition Rented or offered for rent for a period of less than 90 days.
  • What non-compliant means The province or municipality does not permit short-term rental, or permits it and the required registration, licence, or permit was not obtained.
  • The 2024 transitional rule Compliance treated as met for the year where the registration, licence, or permit is obtained by the year end date set out in the rules.
  • What counts as residential property A house, apartment, condominium, cottage, mobile home, and the other property types listed.
  • How wide the application is Renting the basement, renting the cottage seasonally or casually, renting a condo, and listing on a short-term platform.
  • What clients actually do Report the income and pro-rate expenses, report the income and claim an unreasonable share of expenses, or net expenses against income and report nothing at all.
  • The two questions on the file Whether there is a short-term rental and whether it is compliant, and whether the expenses claimed are reasonable in the circumstances.
  • Municipal requirements The categories of requirement imposed across provinces and municipalities, and the licensing position in a major market as the illustration.
  • The action Check whether the use is permitted, register or obtain the licence where required, and deal with the municipal accommodation tax where it applies.
expand_more The Canadian Entrepreneurs' Incentive: Excluded Businesses, the 5% Ownership and 24-Month Tests, Active Participation, and the Butterfly Restriction

A deduction with a long exclusion list, several undefined terms, and a claim order to decide before the sale.

  • What it is A deduction operating in a similar way to the capital gains exemption, introduced alongside the change to the inclusion rate and the increase in the exemption limit.
  • The three gates Which corporations and assets are eligible, an ownership test, and an active participation test.
  • The excluded businesses Professional practices, a business whose principal asset is the reputation, knowledge, or skill of one or more employees, consulting services, and virtually all financial services.
  • The rest of the exclusion list Insurance services, services related to appraising, leasing, managing, selling, or renting real property for others, the purchase, sale or rental of real estate, hospitality including hotels, resorts and camps, restaurants and prepared food and beverage services, and cultural, entertainment, and recreational operations including sports.
  • What is left Manufacturing and most retail businesses, which is where the analysis usually lands.
  • The ownership test At least 5% of the shares by votes and value, or a 5% interest in the assets, held throughout a 24-month period.
  • The participation test Active participation in the business by the individual selling the shares or assets, measured over a three-year period.
  • The undefined terms What 5% of issued shares means where preferred and common shares and a minority discount are in play, whether 24 continuous months means 24 complete months, and whether three years is measured as 1,095 days.
  • Where a trust holds the shares The holding does not qualify, which is a live problem for the freeze structures already in place.
  • Voting shares A shareholder without voting shares fails the test regardless of value held.
  • The butterfly restriction A type (b) butterfly carried out before the sale denies the incentive, mirroring the rule that denies the capital gains exemption.
  • The ordering decision Which incentive to claim where the gain falls within the capital gains exemption limit, how the incentive stacks with the exemption and the annual allowance at the lower inclusion rate, and why spreading ownership among active family members is worth doing before a sale.

Learn Directly from Tax Experts

Michael Cadesky
Michael Cadesky
FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Managing partner at Cadesky Tax, practising since 1980 and a Fellow of CPA Ontario. Past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Co-author of 11 books on tax subjects.

Hugh Woolley
Hugh Woolley
CPA, CA, TEP

Independent tax consultant who has taught income tax for over 30 years. Hugh has written courses for CPA Canada and over 10 papers for the Canadian Tax Foundation and STEP Canada. From 1990 to 1992 he worked at the CRA's Rulings Directorate in Ottawa writing butterfly tax rulings, and is a past Governor of the Canadian Tax Foundation.

Frequently Asked Questions

Can I start right away? expand_more

Yes. Recorded live on October 22, 2024 and available on demand. Register and begin immediately at your own pace.

Does this course provide verifiable CPD? expand_more

Yes. You will receive a verifiable CPD certificate for 2.0 hours of instructional learning upon completion.

What is included with registration? expand_more

The full seminar recording, the slides, the detailed notes, and the Technical Corner, with one year of access from your date of registration.

Are the rules still current? expand_more

The disclosure regimes in sections 237.3, 237.4, and 237.5 apply to transactions entered into after June 21, 2023, and the audit powers in section 231.41 and section 231.9 come from the 2024 legislation. The designated transaction list under section 237.4 is maintained on the CRA website and is added to over time, so the list itself should be checked when you apply the rules to a file.

Who is this course for? expand_more

CPAs and tax professionals who bill for planning work, respond to CRA information requests, sit in on client interviews, or advise on residential property and business sales. Anyone who signs an engagement letter for tax planning has an interest in the section 237.3 material.

Is there a cost to register? expand_more

Registration is $150 CAD, a one-time payment with no subscription required.

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