Overview

For more than 30 years, the GAAR has been applied by the Canada Revenue Agency (CRA) as an all-encompassing rule to deny tax benefits obtained by taxpayers under the ITA through what it considered abusive tax avoidance transactions. It is one exception to the cardinal principle that taxpayers are entitled to order their affairs to minimize tax.

The GAAR will apply when a taxpayer has obtained a “tax benefit” through an “avoidance transaction” or a series of transactions that contain an “avoidance transaction” if it results in a “misuse or abuse” of the ITA. The burden of proving that there’s been a misuse or abuse of the ITA lies with the CRA. 

In the 2020 Fall Economic Statement, the Department of Finance announced its intention to modernize the GAAR and a consultation paper detailing the proposed amendments was subsequently released.

Following this consultation, the Department of Finance proposed to make significant changes to the GAAR. These proposed changes are now reflected in the amendments put forward by Budget 2023. The Department of Finance is running a consultation until May 31, 2023, after which it intends to publish revised legislative proposals and announce when the amendments will come into force.

Who will this affect?

This will affect all taxpayers resident in Canada (public and private corporations, trusts and individuals) as well as taxpayers who are not Canadian residents but who carry out transactions in Canada resulting in tax benefits in Canada or under a tax treaty between Canada and another country. 

Key Elements

Preamble

The preamble would acknowledge that the GAAR is intended to strike a balance between taxpayers’ need for certainty in planning their affairs and the government’s responsibility to protect the tax base and the fairness of the tax system. The preamble would also mention that the GAAR applies regardless of whether or not the tax planning strategy used to obtain the tax benefit was foreseen.

Avoidance transaction

A transaction is not an “avoidance transaction” – and therefore not subject to the GAAR – if it “may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.” 

This “primary purpose” test exists because the GAAR, as it was intended, was not meant to interfere with transactions undertaken for commercial or financial reasons, or driven by other considerations such as family relationships or creditor proofing.

Budget 2023 proposes to amend subsection 245(3) to reduce the threshold from a “primary purpose” test to a “one of the main purposes” test.

Economic substance

Budget 2023 proposes to add an “economic substance” rule relevant for determining whether there was an “abuse or misuse.” 

Proposed subsection 245(4.1) would provide that if an avoidance transaction is significantly lacking in economic substance, it would tend to indicate that the transaction results in a misuse or abuse. Factors used in this analysis would include, for example, (i) whether all or substantially all of the opportunity for gain or profit and risk of loss of the taxpayer remains unchanged, (ii) whether the expected value of the tax benefit exceeded the expected non-tax economic return and (iii) whether the entire, or almost entire, purpose for undertaking or arranging the transaction or series of transactions was to obtain the tax benefit.

Penalty

Proposed subsection 245(5.1) would provide for a penalty equal to 25% of the amount of the tax benefit if a transaction is subject to the GAAR. Where the tax benefit involves a tax attribute that has not yet been used to reduce tax, the amount of the tax benefit would be considered to be nil. The penalty could be avoided if the transaction is disclosed to the CRA in accordance with the proposed mandatory disclosure rules. 

Reassessment period

Budget 2023 proposes to extend the normal reassessment period provided for in subsection 152(4) by three years for GAAR assessments unless the transaction had been disclosed to the CRA.

How can we help?

Our team of experienced tax disputes lawyers has handled a significant number of GAAR cases over the years, both administratively and judicially. In light of the uncertainties raised by Budget 2023 on the prospective application of the GAAR, do not hesitate to contact one of them. 

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