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.
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.
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.
39060-1766 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.
4Ibid, at paras. 40-41.
5 See Agence du revenu du Québec c. 9060-1766 Québec inc., 2016 QCCA 882, at para. 11.
6Entreprises 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.
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