General Anti-Avoidance Rule (GAAR) : Tax tips

 

Application of the GAAR involves three steps

The Supreme Court of Canada has released 2 cases dealing with the general anti-avoidance rule (GAAR) in the Canadian Income Tax Act, The Queen v Canada Trustco Mortgage Company and Kaulius et al v The Queen. It has ruled that the application of the GAAR involves three steps.

It must be determined:

(1) whether there is a tax benefit arising from a transaction or series of transactions within the meaning of s. 245(1) and (2) of the Income Tax Act;

(2) whether the transaction is an avoidance transaction under s.245(3), in the sense of not being “arranged primarily for bona fide purposes other than to obtain the tax benefit”;

and

(3) whether there was abusive tax avoidance under s.254(4), in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer. The burden is on the taxpayer to refute points (1) and (2), and on the Minister to establish point (3).

GAAR assessment cannot give rise to penalties for non-compliance with the technical sections

In the recent Tax Court of Canada decision in Copthorne Holdings Ltd. v The Queen 2002-1316(IT)G the court held that a general anti-avoidance rule (GAAR) assessment under section 245 of the Income Tax Act cannot give rise to penalties for non-compliance with the technical sections of the Act.

General Anti-Avoidance Rule (GAAR)

The Queen v MacKay et al, 2008 FCA 105 is a recent Federal Court of Canada decision holding that a series of transactions was contrary to the Canadian Income Tax Act’s General Anti-Avoidance Rule (GAAR).

General Anti-Avoidance Rule (GAAR)

In Landrus v. The Queen, 2008 TCC 274, the Tax Court of Canada held that the general anti-avoidance rule (GAAR) did not apply to a series of transactions whereby a terminal loss was triggered on the sale of assets.