Shawn Porter suggests that the identification of hallmarks should be informed by the legislative purpose “to identify potentially abusive transactions”

Shawn Porter, who was an Associate Assistant Deputy Minister, Tax Policy Branch during the design of the more recent mandatory reportable transaction (RT) rules, has co-authored an article providing perspectives on when these rules should be engaged.

The article suggests:

Hallmarks are intended to identify potentially abusive transactions on the basis that such transactions often exhibit a hallmark. …

[H]allmarks do not just exist in the ether; rather, they reveal themselves in circumstances where their presence may influence or cause a party to engage in the targeted riskier behaviour by entering into the potentially aggressive transaction.

In particular, since the contractual protection (CP) hallmark must be present by the time that the avoidance transaction was completed, it follows that “[p]rotection arising after the relevant avoidance transaction is consummated—and operating for the benefit of an arm’s-length person not involved with or interested in the earlier transaction that gave rise to the tax risk—is not the target.”

Thus, the Explanatory Notes “differentiate, appropriately, between (1) a situation where a purchaser obtains protection from pre-sale liabilities (including tax) and (2) a situation where insurance is obtained to cover specific identified tax risks in relation to avoidance transactions.”

Similarly, the CRA guidance indicates that protection relating to existing pre-closing tax issues, the quantum of existing tax attributes, and pre-sale safe income dividend transactions, do not bear the CP hallmark.

However, the CP hallmark would apply if CP were received after the fact, but the taxpayer seeking the benefit knew in advance that this would occur, or if the purchaser and vendor agreed to reduce the risk of a contemporaneous avoidance transaction under the guise of standard indemnities.

Neal Armstrong. Summary of Rob Jeffery and Shawn D. Porter, “Mandatory Disclosure: A Reasonable Balance Between Timely Information and Administrative Burden,” Perspectives on Tax Law & Policy, Vol. 4, No. 3, September 2023, p. 4 under s. 237.3(1) – contractual protection.