GAAR Turns 25

It has been 25 years since the General Anti-Avoidance Rules (GAAR) were implemented as part of our tax code; their application remains somewhat uncertain and experts disagree over its effectiveness.

On September 26th, the Canadians Tax Foundation Young Practitioners Group in Toronto met with an impressive group of judges and finance officials to discuss the GAAR’s impact over the last two and a half decades and how to proceed with its application to ensure its objectives are attained.

Notably present at the conference were Justice Karen Sharlow (Federal Court of Appeal), Justice Patrick Boyle (Tax Court of Canada), Phil Jolie (formerly of the Canada Revenue Agency), Ed Kroft (Blake, Cassels & Graydon LLP), Patricia Lee (Department of Justice) and Shawn D. Porter (Deloitte LLP and formerly at Department of Finance).

Interestingly, those present proffered differing opinions on the effectiveness of the GAAR to date. Phil Jolie felt as though the GAAR has not been successful in deterring aggressive tax planning, whereas some of the others described it as having a “chilling” effect, particularly with public companies that are concerned with their reputations.

It was noted by Patricia Lee that the Department of Justice is litigating 44 cases at the moment where the GAAR is a pertinent issue. Those cases involve the following types of transactions:

- Value shifting and capital loss creations;
- Reverse attributes with trusts;
- Base averaging of shares sold to a spouse;
- Surplus stripping and, in particular, cross-border surplus stripping;
- Manipulation of adjusted cost base of property;
- Acquisition of tax credits and change in control; and
- Leverage donation cases.

The common complaint with the GAAR is that it remains uncertain when it will apply. Some degree of uncertainty is likely unavoidable given the fact specific nature of each determination, but perhaps clearer reasons given by tax court judges for the application of the GAAR will help.

In particular, the panelists stated that the interpretation of the “misuse and abuse” test found in Section 245 of the Income Tax Act (the Act) is an area that can continue to be clarified by the courts. While that appears to be a good starting point, judges have been trying to clarify this for at least two decades now; one would wonder if much is going to change anytime soon. 

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.