Here’s an important, timely update for you from the Tax & Trusts Group at Cassels Brock.

Supreme Court of Canada Releases Groundbreaking Decisions on the General Anti-Avoidance Rule

The Supreme Court of Canada has released two groundbreaking decisions on the general anti-avoidance rule (GAAR) set forth in section 245 of the Income Tax Act (Canada) (the “Act”). Since its enactment in 1987, GAAR has cast a shadow over all Canadian tax planning. The mere threat of its use often resulted in otherwise viable tax planning being abandoned. There were no clear rules for applying GAAR, often making it impossible to know what the tax consequences of a transaction might be, and giving the Canada Revenue Agency a very strong hand to play with taxpayers. The unanimous decisions of the Supreme Court of Canada in Canada Trustco and Mathew have cast much of this uncertainty aside and have reintroduced clarity and certainty to tax planning.

The Court has said that three requirements must be established before GAAR will be applied to a transaction or a series of transactions:

1) a tax benefit must result;
2) the transaction must be an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken or arranged primarily for a genuine purpose other than to obtain a tax benefit; and
3) there must be abusive tax avoidance, such that the tax benefit received would be inconsistent with the object and spirit of the provisions relied upon by the taxpayer.

While the burden is on the taxpayer to refute the first two prongs of the test, the Canada Revenue Agency must establish the third prong. If the existence of abusive tax avoidance is unclear, the Court said that the benefit of the doubt goes to the taxpayer.

These two cases have established that GAAR must be interpreted and applied in a manner that preserves the values of consistency, predictability and fairness in tax law. GAAR does not permit courts to rewrite the provisions of the Act or impose their own view of object and purpose; the courts must only interpret and apply the Act. Taxpayers are allowed to take full advantage of the provisions of the Act conferring tax benefits, provided their transactions do not defeat the underlying rationale of these provisions. GAAR cannot be used to set aside the provisions of the Act simply because the Canada Revenue Agency does not agree with the tax benefits obtained by the taxpayer.