Supreme Court releases decisions on GAAR

The Supreme Court of Canada has released two groundbreaking decisions on the general anti-avoidance rule set forth in Section 245 of the Income Tax Act.

As noted in an e-lert from Cassels Brock, GAAR has “cast a shadow over all Canadian tax planning” since its enactment in 1987. Since there were no clear rules for applying rule, it was often impossible to know what the tax consequences of a transaction might be. But the unanimous decisions of the Supreme Court of Canada in Canada Trustco and Mathew have done away with much of this uncertainty.

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

a tax benefit must result;
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
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 it is up to the taxpayer to refute the first two parts of the test, the Canada Revenue Agency must establish the third. If it is unclear whether there is abusive tax avoidance, the court said “the benefit of the doubt goes to the taxpayer.”

The e-lert notes that “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 ... 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.”