Court Case: Westminster vs The GAAR

The Westminster Principle, named after the 1935 House of Lords decision in The Duke of Westminster's Case, holds that a taxpayer can legally arrange their affairs to minimize tax payable, regardless of motive. This tenet of our tax jurisprudence is seemingly contradicted by Canada's General Anti-Avoidance Rules (GAAR) which were introduced in 1988.

In 1984 the Supreme Court in Stubart refused the Government's argument that transactions must have a legitimate business purpose. Following this decision Parliament added section 245 of the Income Tax Act which now provides the CRA with an opportunity to reassess taxpayers who have complied with the letter of the law, but who they feel have "misused or abusedî the provisions; uncertainty is inescapable.

Fortunately, Canada retains the structure of the British common law system that upholds the rule of law and the separation of powers between the three branches of government- legislative, executive, and judicial. The independence of the judiciary is therefore a cornerstone of our system, and recent judgments from the Tax Court of Canada and the Federal Court of Appeal re-affirm that autonomy. This is good news for taxpayers challenged by creative CRA claims that they have "misused or abusedî the provisions of the Act in order to produce a tax benefit.

In Lehigh Cement Limited v. Canada, 2010 FCA 124, the CRA contended that Lehigh had contravened the spirit and intention of the Act in structuring its finances; the Federal Court of Appeal unanimously disagreed and provided some valuable information.

These sort of judicial statements are reassuring for Canadian taxpayers and lawyers. The continuing independence of the judiciary has mitigated the seemingly limitless ambit of the GAAR and the CRA's ability to question the purpose of certain business transactions. The judiciary are bound by the legislation that Parliament enacts, but they undoubtedly strive to protect taxpayers from aggressive and asinine assertions from the CRA who attempt to claim that the GAAR is a set of ëcatch-all' provisions for any transactions that they feel provide a tax benefit unforeseen by Parliament.

The GAAR creates uncertainty in the law, which is never a welcome attribute. The rule of law, the notion that all laws should be made prospectively and not retroactively, that they should be clear and available to all concerned, and that nobody should suffer a loss of liberty as a result of arbitrary governmental power, is the foundation of the Westminster Principle and our common law system. The GAAR sits uncomfortably with these long held principles and therefore the independence of the judiciary is more important than ever in Canadian tax law jurisprudence. The common law, meaning the binding and/ or persuasive judicial statements and interpretations of legislation and previous case law, will continue to be the only avenue of clarity for the nebulous General Anti-Avoidance Rules unless Parliament amends them. It will be interesting to see whether the Westminster Principle can stand its ground with the help of the judiciary or whether the GAAR will ultimately prevail; these recent comments offer a shimmer of hope for Canadian taxpayers.

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