UPDATE - DECEMBER 23, 2020 DEADLINE - Information Bulletin 2019-5 – New Mandatory Disclosure of Nominee Agreements
Further to the statements made in Budget 2019-2020 about strengthening mandatory disclosure mechanisms, and improving rules governing the use of nominees, the ministère des Finances du Québec released Information Bulletin 2019-5 on May 17, 2019 (the “Bulletin”).
A nominee agreement is a mandate under which a person nominates another person to enter into a contract with a third party on his or her behalf, generally without informing the third party that the nominee is acting on his or her behalf. Such agreements are common in real estate transactions.
The Bulletin indicates that Québec tax legislation will be amended such that the parties to a nominee agreement made as part of a transaction or series of transactions will have the obligation to disclose certain information to Revenu Québec (“RQ”). Specifically, the disclosure of a nominee agreement must be made through a prescribed information return, and must include:
- the date of the nominee agreement;
- the identity of the parties to the nominee agreement;
- a full description of the facts of the transaction or series of transactions to which the nominee agreement relates and the identity of any person or entity for which such transaction or series of transactions has tax consequences; and
- any other information requested in the prescribed form.
This information return must be filed with RQ no later than 90 days after the date on which the nominee agreement was concluded. At least one of the parties to the nominee agreement must file the information return. While a prescribed information return has yet to be released, taxpayers subject to Quebec tax laws are advised to disclose the relevant information to RQ in the meantime without the use of a form.
Failure to file the information return within the prescribed time limit will result in the parties to the nominee agreement being jointly liable for a penalty of $1,000 and an additional penalty of $100 per day, up to a maximum of $5,000, starting on the second day of the omission. Such a failure will also result in the prescription period, otherwise applicable to a taxation year for a party to a nominee agreement, to be suspended with respect to the tax consequences arising from a transaction or series of transactions that occurred that year and that are part of the nominee agreement.
The disclosure requirement will apply to nominee agreements concluded on or after May 17, 2019. In addition, a nominee agreement entered into prior to May 17, 2019, that relates to a transaction or series of transactions having tax consequences that continue on or after May 17, 2019, must be disclosed to RQ no later than September 16, 2019.
There is some uncertainty as to the scope of the expression “tax consequences” as it relates to nominee agreements. In the case of real estate transactions, it appears that a nominee agreement entered into before May 17, 2019, might not be subject to the disclosure requirement provided the nominee is not involved in a transaction or series of transaction that have tax consequences on or after May 17, 2019. However, it appears that a situation where a nominee is (for example) declaring rental income or claiming capital cost allowance on or after May 17, 2019, may entail a transaction or series of transactions that have income tax consequences such that the corresponding nominee agreement, even if entered into prior to May 17, 2019, would have to be disclosed. For now, it does not appear that nominee agreements made in the past for Quebec land transfer tax purposes, or other non-income tax purposes such as administrative simplicity, need to be disclosed. This may change as additional guidance from RQ is provided. For now, it appears that nominee agreements made on or after May 17, 2019, must be disclosed, regardless of the reason for the agreement, and perhaps even if there are no "tax consequences" to the agreement.
UPDATE: Entry into force of the obligation to disclose nominee contracts in Quebec: December 23, 2020, Deadline
As per our original article concerning the obligation to disclose certain nominee contracts to Revenu Québec (“RQ”), the National Assembly has adopted the Act giving effect to the tax measures announced on the occasion the budget speech of March 21, 2019 and certain other measures (the “Disclosure Law”), which came into force on September 24, 2020.
Several elements presented by the Quebec Minister of Finance in Information Bulletin 2019-5 have been confirmed or clarified by the new Disclosure Law. The most important points are:
- only nominee contracts entered into as part of a transaction giving rise to "tax consequences" under the Taxation Act after May 16, 2019, are subject to the disclosure obligation;
- the disclosure requirement applies to any taxpayer or member of a partnership (but only general partners in the case of limited partnerships) who have entered into a nominee agreement;
- the disclosure made by one of the parties to the nominee contract will be deemed to have been made by all the parties to the contracts;
- the disclosure must be made using a prescribed form TP-1079.PN (here);
- the deadline for making the disclosure is the latest of:
- the 90th day following the date of the conclusion of the nominee contract; or
- December 23, 2020;
- the penalty applicable jointly and severally to the parties in the event of the failure to disclose within the prescribed time limits will not exceed $5,000; and
- if the disclosure is not made, the limitation period otherwise applicable to a taxation year of a party to the nominee contract will be suspended with respect to the "tax consequences" which result from a transaction which is part of the nominee contract, but only to the extent that the reassessment can reasonably be considered to relate to these "tax consequences" .
Despite the questions raised following the publication of Information Bulletin 2019-5, the Disclosure Law does not define the notion of "tax consequences". However, the Disclosure Law clarifies that only "tax consequences" under the Taxation Act (Quebec) are covered, thus excluding tax consequences under other laws, in particular the Act respecting the Quebec sales tax (QST) and the Act respecting duties on transfers of immovables (Quebec land transfer tax).
In an interpretation letter published in July 2019, so before the filing of the Disclosure Law, RQ responded to a request for clarification regarding the expression “tax consequence” by indicating, unsurprisingly, that this concept should be interpreted in a liberal manner so as to target, in particular, income, expenditures, depreciation, and the creation of tax attributes, and continues as follows:
"In our opinion, any duty, tax or contribution under the responsibility of Revenu Québec is likely to result in the existence of consequences in terms of income tax or to occur concomitantly with them. Thus, income tax consequences are expected to result from the vast majority of business transactions." [unofficial translation]
Following this reasoning, RQ specifies that the simple creation of adjusted cost base for the taxpayer on the acquisition of a building qualifies as a “tax consequence”, as does the accumulation of years for the purposes of calculating the principal residence deduction. This interpretation leads RQ to consider that that the disclosure obligation applies to nominee contracts which are concluded:
- for non-tax purposes, including only for administrative simplicity;
- for the sole purposes of Quebec land transfer duties; and/or
- in the context of real estate transactions, regardless of whether the nominee takes into account rental income or depreciation for tax purposes or not.
RQ believes that it is up to each taxpayer to determine the "tax consequences" specific to their situation, and so it seems difficult to identify situations which, in accordance with RQ's position, certain real estate nominee contracts would be excluded from the disclosure obligation.
Do not hesitate to contact a member of our team for any questions or more advice if you believe you are affected by these new disclosure obligations for nominee contracts, if your particular situation makes it difficult for a possible disclosure before December 23, 2020, or if you need assistance in order to comply with this new obligation.