Ineligibility for public contracts in Québec to result from tax avoidance penalty

On February 21, Québec enacted An Act mainly to establish the Centre d’acquisitions gouvernementales and Infrastructures technologiques Québec (Penalty Act). Included in the Penalty Act are provisions to add a company to the register of enterprises ineligible for public contracts (REIN) if the company is assessed a certain tax avoidance penalty and fails to reverse it through the tax dispute process. The REIN is publicly available and searchable online. Being placed on the REIN could negatively impact a company’s reputation and prohibit public contracts with the province of Québec.

What you need to know

• Federal and Québec GAAR. Both federal and Québec tax laws have a general anti-avoidance rule (GAAR). The GAAR denies a tax benefit where, among other things, a taxpayer complies with the wording of a provision but is considered to have misused or abused the provision in light of its text, context and purpose.
  • When a federal GAAR assessment is issued by the Canada Revenue Agency (CRA) to a company subject to income tax in Québec, Revenu Québec will typically issue a parallel Québec GAAR assessment. Some Québec GAAR assessments also result directly from a Revenu Québec audit.
  • Québec tax law includes a GAAR penalty. The amount of the penalty is equal to 50 percent of the tax assessed under the Québec GAAR. There is no federal equivalent of this penalty. In general, the GAAR penalty applies for all Québec GAAR assessments, unless the company has met specific reporting requirements in respect of the transaction(s) at issue, or can establish a due diligence defense.
• The Penalty Act. The Penalty Act amends existing laws to add companies to the REIN for a period of five years if Revenu Québec assesses the company or a related person with a GAAR penalty and the penalty is not reversed through the ordinary tax dispute process. In particular, registration will occur when all rights of objection to the penalty assessment have expired, or when any objection or court appeal has been permanently settled (if applicable).
• The REIN. By law, the REIN is public and searchable on the website of the Autorité des marchés publics (AMP). In general, public bodies in Québec are prohibited from entering into contracts with companies listed on the REIN, unless exceptional circumstances arise.
• Timing. These changes apply for tax audits by the CRA or Revenu Québec that begin after April 21. Companies may avoid the possibility of a GAAR penalty by making certain filings with Revenu Québec before this date.

Background on Québec’s aggressive tax planning initiatives

Québec enacted the GAAR penalty in 2009, in response to tax plans focused on reducing or eliminating provincial taxation, such as the “Québec Shuffle” or the “Québec Truffle”. The GAAR penalty was combined with other provincial aggressive tax planning (ATP) measures and with additional funds for Revenu Québec’s ATP section.

Initially, the amount of the GAAR penalty was 25 percent of the tax assessed by the Québec GAAR assessment. It applied to transactions taking place after October 14, 2009¹. In June 2019, the Québec GAAR penalty was increased from 25 percent to 50 percent for transactions carried out after November 9, 2017².

No GAAR penalty applies where the taxpayer has filed certain information returns with Revenu Québec. These returns are of two types. The first type is mandatory information returns required for certain transactions such as transactions involving contingency fees paid to advisors, or a confidentiality clause binding to the taxpayer. The second type is a preventative disclosure taxpayers can make with respect to transactions carried out. Prescribed forms are required for all such returns. In addition, the GAAR penalty will not apply where the taxpayer establishes a due diligence defense.

As part of the 2009 ATP measures, Québec also enacted legislation to extend by three years the limitation period for assessing the GAAR. As such, Québec has six years from the initial assessment of a taxation year to issue a reassessment that includes the GAAR, and seven years for corporations that are not Canadian-controlled private corporations. There is no federal equivalent of this extension of time to issue GAAR assessments.

In its “Tax Fairness Action Plan” published on November 16, 2017, Québec announced new measures to “remove from the roster of government suppliers those that practice abusive tax avoidance, including abusive tax avoidance using tax havens”. Initially, Québec proposed that all taxpayers who are ultimately liable for an assessment under the Québec GAAR (not just the penalty) be unable to obtain authorization to bid for public contracts. This proposal was later tied to the GAAR penalty. The 2019 Québec budget stated the “penalty [for abusive tax avoidance] will be considered in deciding whether the Autorité des marchés publics will authorize a business to enter into contracts with a public body or not”.

The Penalty Act

The Penalty Act was introduced on September 18, 2019. Included in the proposed legislation were amendments to An Act Respecting Contracting by Public Bodies (Contracting Act) to make it possible to record a company in the REIN where the company was ultimately liable to pay the GAAR penalty, and to allow the AMP to take the penalty into account under the contracting regime it administers in accordance with the Contracting Act. The Penalty Act received assent on February 21, 2020.

Companies are listed on the REIN when found guilty of certain penal or criminal offences such as bribery of judicial officers, extortion, or laundering proceeds of crime. These offences are listed in Schedule I of the Contracting Act. Companies are also listed on the REIN if the AMP revokes or refuses to issue or renew an authorization to contract with public bodies.

The Penalty Act amended the Contracting Act to deem companies that are ultimately liable to pay a GAAR penalty to be guilty of an offence listed under Schedule I, resulting in addition to the REIN.

A company listed on the REIN can apply to the AMP for authorization to contract with a public body. Successful applicants will be removed from the REIN. Being found guilty of an offence listed on Schedule I of the Contracting Act is one factor (among others) that the AMP will take into account to determine if the company has the high standard of integrity required to receive an authorization to contract. As a result of the Penalty Act, the AMP will take into account whether a company was ultimately liable to pay a GAAR penalty when determining whether a company has sufficient integrity to contract with the Québec government.

The relevant sections of the Penalty Act will come into force for GAAR penalties assessed as a result of Revenu Québec or CRA audits or investigations starting 60 days after the Penalty Act received assent, although a company will not be placed on the REIN until after the GAAR penalty is upheld by the ordinary tax dispute process.

Within 60 days after the Penalty Act received assent, companies will be able to file an information return to (among other things) make a preventative disclosure of any transaction (provided the transaction is not yet under audit). Such transactions will be exempt from GAAR penalties. Filing the information return will extend the statute-barring date to allow Revenu Québec to assess the transaction under the GAAR within one year of the filing (if this date is later than the extended reassessment period for Québec GAAR reassessments).

Québec assessments consequential to federal assessments

Where a corporation is subject to Québec income tax, Revenu Québec has one year to issue a consequential provincial GAAR assessment after the federal GAAR is assessed. As described above, Revenu Québec also has an extended reassessment period available for GAAR assessments.

Purpose of the REIN

The REIN was created in 2012 in the wake of issues in Québec linked to public contracts and the construction industry. Companies are added to the REIN when found guilty of criminal or penal offences. Companies are also added to the REIN if their request for an authorization to contract with a public body is refused, revoked or not renewed by the AMP.

The REIN is, by law, public and searchable online. In a 2015 case, the Québec Superior Court stated addition to the REIN is an “extremely severe penalty”³. The Court further noted a “general prohibition against contracting with the government for an extended period constitutes a stigmatization of the company concerned, with a very significant deterrent effect”, and that “the general ineligibility for public contracts that results from a conviction under a provision of the [Contracting Act] or its regulations is more akin to a punishment than to a mere administrative consequence”⁴.

An open question is whether addition to the REIN is a penal sanction⁵. The distinction between penal and administrative sanctions is significant, because penal sanctions entitle the accused to the procedural safeguards provided for in section 11 of the Canadian Charter of Rights and Freedoms, such as the presumption of innocence and protection against self-incrimination. Mere administrative sanctions do not give rise to these procedural safeguards.

Judicial review of decisions of the AMP

Decisions of the AMP are subject to judicial review in Québec courts. In a decision from 2019, the Québec Superior Court granted an application for judicial review by a company that had been placed on the REIN. The AMP had refused the company’s application for authorization to enter into public contracts because one of its associated companies was alleged to have breached one of the statutes listed in Schedule I of the Contracting Act.⁶

According to the Contracting Act, a company’s ineligibility to enter into public contracts can be triggered and the company can be added to the REIN if a person associated with the company is found guilty of an offence listed in Schedule I. For purposes of the Contracting Act, persons associated with a company are its directors and officers, as well as its shareholders holding 50 percent or more of the voting rights attached to the shares that may be exercised under any circumstances, as well as other persons or entities that have direct or indirect legal or de facto control over the company.

In Entreprises JRMorin, the company successfully challenged the AMP’s decision to refuse authorization, which led to automatic placement on the REIN under the Contracting Act. The successful challenge was made on the grounds that the AMP decision-making process and the decision itself did not comply with the principles of natural justice.

Companies that are placed on the REIN because the Contracting Act deems them to be guilty of an offence listed in Schedule I to the Contracting Act may apply for authorization to enter into public contracts with the AMP, and apply for judicial review of any refusal. The issuance of an authorization results in removing the company’s name from the REIN. The process can be time-consuming; in Entreprises JRMorin the company received a refusal two years after filing an application.

According to the Contracting Act, the AMP does not have discretion to issue an authorization to a company if its officers or directors or any of its prescribed shareholders who are natural persons were found guilty of an offence listed in Schedule I in the preceding five years.

Conclusion

Being added to the REIN is a serious penalty for companies. The company becomes ineligible for public contracts with the province of Québec, and there may be reputational risk associated with being listed on the REIN. The REIN is public, easily searchable online, and since its inception was aimed at those found guilty of criminal or penal offences.

Going forward, companies liable to tax in Québec will need to consider the REIN in their tax dispute strategy when facing a GAAR assessment that includes a GAAR penalty, for CRA or Revenu Québec audits that begin after April 21.

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¹ This did not include transactions that were part of a series of transactions started before October 14, 2009 and completed before January 1, 2010.

² This did not include transactions that were part of a series of transactions started before November 9, 2017 and completed before February 1, 2018.

³ 9060-1766 Québec inc. c. Agence de revenu du Québec, 2015 QCCS 3339, at para. 38; aff’d Agence du revenu du Québec c. 9060-1766 Québec inc., 2016 QCCA 882.

⁴ Ibid, at paras. 40-41.

⁵ See Agence du revenu du Québec c. 9060-1766 Québec inc., 2016 QCCA 882, at para. 11.

⁶ Entreprises JRMorin inc. c. Autorité des marchés publics, 2019 QCCS 4669; leave for appeal denied: Autorité des marchés publics c. Entreprises JRMorin inc., 2020 QCCA 87.

Le mois dernier, le Canada a publié sa première Stratégie industrielle de défense (la Stratégie), qui souligne l’engagement du Canada à développer une base industrielle de défense solide et à stimuler la croissance économique. Ces efforts pourraient aussi comprendre le renforcement de l’état de préparation à la biodéfense et aux contre-mesures médicales, ce qui pourrait constituer des débouchés pour le secteur canadien des sciences de la vie en raison de l’importance accordée aux capacités nationales en ce sens et de la nécessité d’atténuer les risques d’urgences sanitaires.

Développement de contre-mesures médicales au Canada

Comme indiqué dans les bulletins précédents, le quatrième pilier de la Stratégie est axé sur la « sécurisation des chaînes d’approvisionnement pour les intrants et les biens clés » par le renforcement de la production nationale et le stockage de ressources. L’accent est mis tout particulièrement sur les contre-mesures médicales, en précisant que nos « alliés ont établi un lien explicite entre l’état de préparation à la biodéfense et aux contre-mesures médicales et leur sécurité économique et nationale, en élaborant de nouvelles stratégies et de nouveaux mécanismes pour faire progresser ces travaux ». Les contre-mesures médicales désignent divers produits réglementés pouvant être utilisés pour protéger la population lors d’une situation d’urgence de grande ampleur, comme l’éclosion d’une maladie ou une attaque impliquant des armes chimiques, biologiques ou nucléaires. Il peut s’agir de vaccins, de médicaments thérapeutiques et produits biologiques, de dispositifs de tests diagnostiques, des équipements de protection individuelle ou industrielle, et d’autres dispositifs médicaux. Les contre-mesures médicales sont essentielles à la réduction et à l’atténuation des dommages lors d’une urgence de santé publique.

Exploiter les voies réglementaires mises en place lors de la pandémie de COVID-19

Pendant et après la pandémie de COVID-19, le Canada a mis en place plusieurs nouvelles voies réglementaires comme mécanismes d’accélération des approbations de produits médicaux, ce qui pourrait offrir au gouvernement des options pour déployer des contre-mesures médicales afin de faire face aux risques pour la santé publique. Au début de la pandémie, Santé Canada a émis diverses ordonnances provisoires pour permettre l’importation et la vente de médicaments et de dispositifs médicaux qui n’avaient pas eu l’approbation des voies réglementaires traditionnelles. Or, Santé Canada a plutôt fait confiance aux voies d’approbation réglementaire et de l’exemption de certaines exigences en homologation de produits des pays impliqués dans la transaction. Beaucoup de ces règles provisoires ont depuis été officiellement intégrées à la réglementation en vertu de la Loi sur les aliments et drogues et ont été appliquées bien après la COVID-19. Conformément au Règlement sur les aliments et drogues, Santé Canada tient à jour la Liste des maladies qui menacent la santé publique et utilisera une procédure d’autorisation modifiée pour les médicaments d’urgence de santé publique pouvant traiter les affections figurant sur la liste. De même, le Règlement sur les instruments médicaux a établi une liste d’instruments médicaux répondant à un besoin urgent de santé publique, ce qui permet à Santé Canada d’autoriser la commercialisation de ces instruments de manière accélérée. Ces outils réglementaires sont utilisés automatiquement quand une situation médicale présente un grand risque pour la santé publique au Canada et nécessite une action immédiate pour contrer ce risque.

Le rôle de la Stratégie dans le renforcement du régime réglementaire de la santé au Canada

La stratégie prévoit que le Canada adoptera une approche proactive en matière de planification en amont des crises sanitaires. Le gouvernement entend s’assurer que les produits médicaux sont déjà disponibles au Canada afin qu’ils puissent être distribués rapidement en cas d’urgence. D’autres modifications récentes au Règlement sur les aliments et drogues permettent de prépositionner au Canada tous les médicaments d’urgence en santé publique, ce qui signifie qu’ils peuvent être importés dans des installations d’entreposage canadiennes avant que leur mise sur le marché n’ait été autorisée. La Stratégie s’appuie sur ces fondements, en faisant référence à l’organisme existant Préparation aux crises sanitaires Canada (PCSC), un organisme opérationnel spécial au sein d’Innovation, Sciences et Développement économique Canada (ISDE), et à un nouveau Fonds des sciences de la vie, lesquels « collaborent avec des partenaires internationaux et de soutenir l’élaboration et la production de contre-mesures médicales ». PCSC supervise la Stratégie en matière de biofabrication et de sciences de la vie du Canada, qui vise à développer un secteur national des sciences de la vie fort et compétitif doté de capacités de biofabrication de pointe, en mettant l’accent sur la capacité à se préparer et à faire face aux futures priorités et crises sanitaires. Dans cette optique, il y aura des occasions pour les fabricants de nouer des collaborations de recherche et des accords commerciaux ou d’approvisionnement liés aux contre-mesures médicales financées par des programmes fédéraux.

Étroitement lié aux capacités nationales, le pilier III de la stratégie implique « Investissement ciblé pour renforcer un secteur canadien de la défense novateur », avec la promesse que le gouvernement fédéral « soutiendr[a] la recherche et le développement, protéger[a] la propriété intellectuelle, soutiendr[a] les petites et moyennes entreprises, investir[a] dans les compétences et la formation, et encourager[a] les exportations afin de créer un secteur de la défense agile et concurrentiel à l’échelle mondiale ». La nécessité de favoriser le développement de la propriété intellectuelle (PI) et la conservation des droits du Canada est mentionnée à plusieurs reprises dans la Stratégie. Par exemple, la Stratégie prévoit l’établissement de partenariats officiels avec l’industrie canadienne qui « [assureront] la propriété et le contrôle nationaux de la propriété intellectuelle (PI) et des capacités essentielles. » La Stratégie reconnaît l’immense talent des établissements canadiens et la précieuse recherche qui y est menée actuellement et qui est déjà financée par des subventions de recherche d’organismes tels que le Conseil de recherches en sciences naturelles et en génie et les Instituts de recherche en santé du Canada, et fait aussi référence à l’engagement de 1,6 milliard de dollars pour de nouveaux fonds de recherche dans le budget de 2025. Cette prise de conscience de la nécessité de promouvoir et de soutenir l’innovation au Canada laisse présager des possibilités de financement, notamment dans les domaines où le Canada accuse un retard en matière de production nationale et où des engagements d’investissement et de fabrication au Canada peuvent être pris.

Prochaines étapes

Dans les prochains mois, nous prévoyons que le gouvernement du Canada publiera d’autres directives et des mesures de suivi. L’équipe de défense des conservateurs poursuivra sa couverture de perspectives sur la défense au Canada en publiant une analyse supplémentaire pour donner des précisions sur l’incidence de la Stratégie sur de multiples secteurs.