S.245 - GAAR - The General Anti-Avoidance Rule
The General Anti-Avoidance Rule (“GAAR”) is a catch-all provision found in section 245 of Part XVI of the Income Tax Act, RSC 1985, c 1 (5th Supp) titled “Tax Avoidance”.
In short, GAAR provides the Canada Revenue Agency (“CRA”) with the broad power to object to a tax benefit that is not considered concurrent with the underlying purpose of the respective legislative provisions.
Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 (CanLII)
In the seminal GAAR decision, Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 (CanLII), the Appellant structured a transaction to defer taxes on profits. The transactions, while objectively in accordance with the legislation, lead to a tax benefit that the CRA and courts determined, through the application of the GAAR, was an abuse of the respective legislative provisions.
The Test for GAAR - Section 245
In Canada Trustco, the Supreme Court of Canada (“SCC”) developed the test for the application of section 245, the GAAR. According to the SCC, three conditions must be met to apply the GAAR to deny a tax benefit:
1.There must be a tax benefit that has resulted from a transaction or part of a series of transactions pursuant to subsection 245(1) and (2) of the Income Tax Act;
2.The transaction under scrutiny must have been carried out to obtain a tax benefit and not for a bona fide purpose; and
3.The realization of a tax benefit was inconsistent with the object, spirit or purpose of the respective provisions resulting in abusive tax avoidance.
The taxpayer has the burden to disprove conditions 1 and 2 and the CRA must prove condition 3;
If it is unclear whether abusive tax avoidance has occurred, the taxpayer enjoys the benefit of the doubt; and
A court must conduct a “unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit” to determine if the impugned result is in accordance with the legislation.
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