Income Tax Act Subsection 245
The General Anti-Avoidance Rule essentially states that where a transaction, or a series of transactions results in a reduction, avoidance, or deferral of taxes owing, and the transaction or the series of transactions are only being attempted for the tax benefits, the transaction or transactions themselves may be invalidated.
The Supreme Court of Canada has established a three-point test in determining whether or not to have GAAR applied.
- Did a tax benefit arise from the transaction or series of transactions?
- Is/Are the transaction(s) found to be avoidance transactions?
- Is the transaction abusive?
Number one is easily satisfied as nearly all transactions are done with a tax benefit in mind.
The second question asks whether the primary purpose of the transaction is to obtain a tax benefit.
The third point is the most difficult point to prove for both sides. The question it poses is whether the transaction is inconsistent with the object, purpose, or spirit of the subsection being used by the taxpayer to obtain the tax benefit.
The above test is extremely vague, and both sides can usually be argued extremely well. If the CRA claims that a taxpayer is in violation of the GAAR, it will be up to the taxpayer to prove they are not. On that same note, the CRA must prove that the GAAR applies.
Guarding against the GAAR is extremely complex. If you are planning a transaction, or a series of transactions that might run afoul of the GAAR, you should seek immediate legal assistance.
CRA Resources
Information Circular 88-2 General Anti-Avoidance Rule – Section 245 of the I.T. – http://www.cra-arc.gc.ca/E/pub/tp/ic88-2/ic88-2-e.html
Case law
JK Read Engineering Ltd v The Queen, 2014 TCC 309 – Arrears Interest Calculation when GAAR Applied
The Queen v Global Equity Fund, 2012 FCA 272 – What is the Underlying Purpose of ITA ss 3, 4, 9, and 111?
Spruce Credit Union v The Queen, 2012 TCC 357 – GAAR analysis framework – Purpose of ITA s 112 – meaning of “in proportion to”
1207192 Ontario Ltd v The Queen, 2012 FCA 259 – How does one detemine the “primary purpose” of a series of transactions for purposes of subsection 245(3)?
For more detailed case law analysis please see here: http://ita-annotated.ca/RecentDecisions/category/substantive-provision/gaar/
