Nov 20, 2023
Two new key features of GAAR (general anti-avoidance rule) introduced by the federal government in draft legislation in August are potentially here to stay, writes Leandra Gupta in her article published in the November edition of Canadian Tax Focus.
The revised draft amendments create a presumption: where an avoidance transaction significantly lacks economic substance, the transaction is presumed to result in a misuse or abuse. This is a change from the draft amendments proposed in the 2023 federal budget, which provided that such transactions “tend to indicate” misuse or abuse. Presumably, the change from “tends to indicate” to the legally recognized concept of a presumption was meant to clarify the role that economic substance now plays in the GAAR analysis.
The budget proposed to introduce a 25% penalty where GAAR was found to apply. It is a strict liability penalty, such that once GAAR applies, the penalty will be imposed. However, the August draft legislation did introduce a token exception to the penalty where the taxpayer can demonstrate that, at the time of the transaction, it was “identical or almost identical” to a transaction that was the subject of administrative guidance, government statements, or court decisions. The purpose of this exception is unclear since it is highly unlikely that GAAR, and thus the penalty, would have applied to such transactions in any event.
Read the full article by author Leandra Gupta published in the November edition of Canadian Tax Focus published by the Canadian Tax Foundation.