Have you disclosed your nominee agreements?
This article is an update on a BloG article published on August 26, 2019, which dealt with the announcement made by the Québec Minister of Finance to amend the tax legislation and impose certain measures designed to counter aggressive tax planning in the context of the action plan to ensure tax fairness.
Among these measures, the Minister announced that the tax legislation would be amended to provide that parties to a nominee agreement have the obligation to disclose such agreement.
This obligation to disclosure was postponed to a later date calculated as of the date of assent of the new legislation.
As such, the Act “to give effect to fiscal measures announced in the Budget Speech delivered on 21 March 2019 and to various other measures”, was sanctioned on September 24, 2020.
Scope of a nominee and extend of the measure
A nominee agreement is an agreement under which a mandate is vested to a corporation or person. Under this mandate, the nominee is entitled to execute certain obligations and retain certain responsibilities for and on behalf of the principal (person who confers a mandate on another). Since the Act does not provide for a definition of the concept of a nominee, we therefore, believe that we should rely on the definition available under the Québec Civil Code.
The main objective of this agreement is usually to protect the identity and/or responsibility of the principal. Under the Act, the disclosure obligation applies to all nominee agreements entered into on or after May 17, 2019.
Thus, the disclosure must be made for any nominee agreements entered into before May 19, 2019, “if the tax consequences of the transaction or series of transactions to which a nominee agreement relates have an impact on or after May 17, 2019”. The Act does not provide for any time limit for the implementation of this measure. Thus, as long as the tax consequences of the transaction continue to have an impact on or after May 17, 2019, the disclosure obligation also applies to the contract concluded.
A disclosure form must be completed for each contract and transmitted under separate cover. Depending on the disclosure form to be used, the Minister exempts the requirement to disclose a nominee agreement if a person meets the following requirements: i) a nominee agreement is executed between an individual and a related person, ii) at the request of a financial institution or iii) for the sake of financing the purchase of an immovable by the individual and that such purchase is intended for his personal use, and iv) the related person co-signs up to 50% of the immovable’s fair market value.
Delays to disclose
The parties to the nominee agreement must disclose the agreement on or before:
- the 90th day following the date of the conclusion of the nominee agreement was entered into (when concluded after September 24, 2020), or
- the 90th day following September 24, 2020 (the date of assent to the Act) namely, before December 23, 2020
The extent of the information to be provided
The Act provides a framework for the method to be used by the parties. Thus, the parties must disclose the following information using the form issued by Revenu Québec which will contain, amongst others:
- the date of the nominee agreement
- the identity of the parties to the nominee agreement
- the full description of the facts relating to the transaction in respect of which the agreement relates
- the identity of any person or entity for which such transaction has tax consequences
Note that the disclosure must not be done by both parties to the nominee agreement and that when the disclosure of the agreement is made by one of the parties, it will then be deemed to have been made by the other party. Finally, the obligation to provide a copy of the nominee agreement also appears to have been removed from the Act.
Penalty and impact
The parties who default or fail to file the declaration within the prescribed delay will jointly incur 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.
Furthermore, if this disclosure is not duly filed within the delay, the limitation period, which would otherwise apply to a taxation year of a taxpayer who is a party to the nominee agreement or a member of a partnership that is a party to the agreement, will be suspended concerning the tax consequences that would result from a transaction that occur this year and that is part of the nominee agreement. The prescription period, normally three years, would thus be extended and would not begin to run for the parties until the time of disclosure of the contract.
Recommendations and remarks
To properly comply with these new measures, we recommend that you apply the following recommendations:
- Keep a record of all corporations acting as nominee within your organization which will include the date of disclosure to Revenu Québec
- Confirm who, between the corporation and the accountant, will be responsible for completing the prescribed form within the delay
- Determine, if applicable, who, between the nominee and the principal, shall be in charge of the disclosure for the parties
- Respect the applicable deadlines for sending forms which can currently only be done by registered mail
- Disclose the nominee agreement even if its existence seems to already be known by Revenu Québec under the terms of a previous income tax return.
We would like to point out, however, that the term “tax consequences of a transaction” is not defined and its scope remains uncertain. Several professional orders expressed to the Minister the uncertainty linked to the imprecision of the expression used [1]. The parties must therefore actively discuss with their legal and accounting professionals to establish and assess whether an existing nominee agreement continues to create tax consequences. Moreover, a more restrictive interpretation of these operations would be encouraged until the arrival of clarifications in this regard.
[1] Chambre des notaires du Québec and Ordre professionnel des comptables professionnels comptables du Québec (Quebec CPA Order)