Subsection 237.5(1)
Relevant Financial Statements
Administrative Policy
Mandatory disclosure rules – Guidance, 15 August 2024 CRA Webpage
Separate reporting by equity-accounting shareholders
If the reporting corporation has uncertain tax positions that are reported on relevant financial statements using the equity method, the reporting corporation is required to report RUTTs on Form RC3133. Each reporting corporation is responsible for reporting its own RUTTs on Form RC3133, not the RUTTs of other related corporations.
No reporting for portfolio investments
Reporting obligations do not generally apply to portfolio investments in private equity limited partnerships or publicly traded partnerships (portfolio partnerships).
Reportable Uncertain Tax Treatment
Administrative Policy
Mandatory disclosure rules – Guidance, 15 August 2024 CRA Webpage
Reportable uncertain tax treatments (RUTTs)
RUTT restricted to matters reported on Canadian returns
- "An uncertain tax treatment is a tax treatment used or planned to be used in an entity’s Canadian income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law."
Timing of RUTTs
- If the RUTT amount is released in the year, then it is not required to be reported on Form RC313, even if it is included in the comparative amounts on the financial statements.
Equity method of accounting
- "If the reporting corporation has uncertain tax positions that are reported on financial statements using the equity method, the reporting corporation is required to report RUTTs on Form RC313. However, when the investment itself pertains to a reporting corporation, only the latter will be required to complete its own RC313."
Articles
CPA Canada, "Uncertain Tax Treatments (“UTT Proposals”)", 5 April 2022 CPA Canada Submission
Should be restricted to Canadian income taxes (pp. 4-5)
- “Reportable uncertain tax treatment” should be adjusted to clarify that the reporting requirement applies only to Canadian income tax (rather than, say, foreign or non-income tax) issues for which uncertainty is reflected in the “relevant financial statements.”
Whether uncertain tax treatment extends to accounting contingencies (pp. 5-6)
- There should be clarification as to whether a “reportable uncertain tax treatment” only includes an uncertainty reported in a corporation’s relevant financial statements as an uncertain tax treatment under its applicable reporting standards- or whether it also includes any additional reserves recorded in such statements respecting a position on a tax return related to rules in the Act. For example, an uncertain tax issue that is not an income tax issue as narrowly defined in IAS 12 and the corresponding US GAAP rules (e.g., a Part XIII or VI tax issues etc.) potentially would not be reported as an uncertain tax treatment under IAS 12 but, rather, as a contingency under IAS 37.
Whether tax credits that have not been fully booked should be included (p. 6)
- There should be clarification as to whether a corporation must report an uncertain tax treatment respecting a tax credit governed by the Act that comes within IAS 20 and the full amount claimed is not reflected in the relevant financial statements (e.g., because there is not yet reasonable assurance that all the conditions will be satisfied).
Non- impacted corporations in the consolidated group should not report (p.7)
- Confirmation should be provided that reporting is required only for issues reflected in the consolidated financial statements by the specific corporations affected and not by every member of the consolidated group.
Reporting Corporation
Articles
CPA Canada, "Uncertain Tax Treatments (“UTT Proposals”)", 5 April 2022 CPA Canada Submission
FX conversion methodology (p. 7)
- Given that the definition of “reporting corporation” is based on whether the corporation has assets with a total carrying value of $50M or more at year end, corporations that have elected under s. 261 for a functional currency should be provided with simple conversion mechanics, for example, using the year end spot rate.
Subsection 237.5(2)
Articles
Dean Landry, Colin Mowatt, "The Uncertainty Surrounding Uncertain Tax Treatments", Perspectives on Tax Law & Policy, Vol. 4, No. 3, September 2023, p. 13
Background (p. 13)
- The key definitions in s. 237.5 are modelled on IFRIC 23, which indicates that if the company identifies an uncertain position and concludes it to be “not probable” that the tax authority or the courts will accept the position, it must “reflect” the effect of that uncertainty in its financial statements.
- A similar “more likely than not” standard applies under US GAAP.
US experience (p. 14)
- The US experience, as discussed above, has been that the US “uncertain tax position” (UTP) rules have not provided any new information to tax auditors and appear to result in an unnecessary drain on resources for taxpayers and the IRS.
Materiality (p. 14)
- In contrast to the UK rules (which apply only if the company has UK turnover in excess of £200 million and assets on the balance sheet of more than £2 billion and only apply to uncertain tax treatments in excess of £5 million), the Canadian rules apply irrespective of the materiality of the uncertain tax position, and the threshold for applying the rules is only $50 million of assets.
- Unlike penalties under the US regime, the substantial Canadian penalties can be imposed for each “reportable uncertain tax treatment” (RUTT) that is not reported, regardless of its size.
- A Canadian member of the group might need to report the uncertain tax treatment in a situation where there is only a nominal impact in Canada.
- In many situations, it might not even be aware of the uncertain tax treatment or have the requisite information to report its existence (the relevant documentation would likely be kept by other members of the group).
- A taxpayer may make a single entry for uncertain tax treatments to account for multiple interdependent potential adjustments, e.g., the reasonableness of a royalty may be considered in light of inter-affiliate charges for tangible goods.
- If the taxpayer were required to report the individual uncertain tax treatment even where an offsetting adjustment nets against the liability, excessive reporting would be the result.
- Note that the s. 237.5(5) penalties may be assessed on each uncertain treatment that is not reported.
Foreign tax treatment (p. 15)
- The RUTT reporting applies only to corporations that are required to file a Canadian income tax return.
- The CRA guidance provides that reporting relates only to Canadian income taxes.
- However, the “tax treatment” definition contemplates that a treatment is in respect of information reported in an income tax or information return and draws no distinction between Canadian and foreign income taxes.
CPA Canada, "Uncertain Tax Treatments (“UTT Proposals”)", 5 April 2022 CPA Canada Submission
Continued reporting of same issue (p. 8)
- Reporting should be required only in years where the computation of the corporation’s taxable income (or loss) is impacted. There should not be continued reporting requirement arising on the same issue, transaction or series of transactions (e.g., multiple penalties should not arise where CRA already was provided with the required information).
Reduced reporting of issues already known to CRA (p. 8)
- Where issues are already known to CRA through filings such as Notices of Objection or pleadings, the s. 237.5 should be satisfied by describing the issue briefly and referencing the previously filed documents.
Failure to deal with off-calendar year taxation years (p. 11)
- Where, for example, a corporation with a March 31, 2022 year end engaged in a transaction in March 2022 that was not determined to create an uncertain tax position until a judicial decision in December 2022, it nonetheless could be required to report this unknown uncertainty when filing its 2022 return by September 2022. Short taxation years should be addressed.
Subsection 237.5(8)
Articles
CPA Canada, "Uncertain Tax Treatments (“UTT Proposals”)", 5 April 2022 CPA Canada Submission
S. 237.5(8) should apply only to factual information (p. 9)
- S. 237.5(8) references “any information” relating to any transaction etc. to which the reportable uncertain tax treatment relates. It should be clarified that this applies only to factual information and not subjective information that was used to determine whether an uncertain tax treatment should be reflected in the financial statements.