GAAR and Canada

In an earlier post I had discussed the GAAR provisions under the Direct tax code 2009. In this post I shall look into the GAAR provisions of Canada which is incorporated under S. 245 of the Canadian Income Tax Act (“Act). S. 245 of the Act was introduced with effect from 13 Sep 1988 as a response to the decision of the Canadian Supreme Court in Stubart Investments Limited v. The Queen ( [1984] CTC 294). In Stubart although the court rejected the traditional “strict interpretation” approach to the interpretation of tax statutes, it re affirmed the traditional approach adopted in C.I.R. v. Duke of Westminster ( [1936] AC 1 (HC)) that tax consequences should be based on the legal character of transactions and relationship regardless of their economic or commercial substance.

The relevant provisions of S. 245 of the Act read as under:


(2) [General anti-avoidance provision] Where a transaction is an

avoidance transaction, the tax consequences to a person shall be

determined as is reasonable in the circumstances in order to deny a tax

benefit that, but for this section, would result, directly or indirectly, from

that transaction or from a series of transactions that includes that

transaction.


(3) [Avoidance transaction] An avoidance transaction means any

transaction


(a) that, but for this section, would result, directly or indirectly, in a

tax benefit, unless the transaction may reasonably be considered to

have been undertaken or arranged primarily for bona fide purposes

other than to obtain the tax benefit; or


(b) that is part of a series of transactions, which series, but for this

section, would result, directly or indirectly, in a tax benefit, unless

the transaction may reasonably be considered to have been

undertaken or arranged primarily for bona fide purposes other than to

obtain the tax benefit.


(4) [Where s. (2) does not apply] For greater certainty, subsection (2)

does not apply to a transaction where it may reasonably be considered that

the transaction would not result directly or indirectly in a misuse of the

provisions of this Act or an abuse having regard to the provisions of this

Act, other than this section, read as a whole.


S. 245(3) stipulates the transactions which are deemed to be avoidance transactions for which consequences would follow as u/s S. 254(2) read with 245(5) [ S. 245(5) is not quoted above]. A Conjunctive reading of 245(3)(a) and 245(3)(b) suggests that an anti- avoidance transaction is one which is made “only” to obtain a tax benefit. More importantly, a literal interpretation of S. 245(4) would suggest that the other provisions of the Act have to be looked into before the GAAR provisions are invoked. In contrast S. 113(14), DTC, 2009 categorizes any transaction whose ‘main purpose’ is to obtain tax benefit as impermissible avoidance arrangement. Evidently, in this regard the GAAR provisions under the DTC are of wider import than S. 245 of the Canadian Income Tax Act. Further, S. 113 (14) (c) of the DTC stipulates that a transaction which “lacks commercial substance” in any manner may be deemed as impermissible avoidance arrangement. If one peruses S. 113 (17) of the DTC which defines the term “lacks Commercial substance” it would leave no iota of doubt that GAAR provisions under the DTC are far more wider than its Canadian counterpart. It is also worth noticing that the Canadian IT Act does not presume any transaction to be for the “main purpose” of obtaining a tax benefit unlike S. 114(1) in the DTC. However, all these points will need consideration at the backdrop of some leading cases.

In my next post I shall discuss some leading Canadian cases on this point and examine the practical application of S. 245 of the Canadian IT Act.