I can never recall off of the top of my head the precise words that express the emotion evoked by the GAAR in particular situations. I thought I would post quotes from actual GAAR cases here that capture that feeling of either the taxpayer or the crown, for quick reference.
Tax Court of Canada – D.G.H. Bowman, Jabs Construction Ltd. v. The Queen, June 25, 1999
[25] GAAR is a measure of last resort invoked to counteract tax avoidance transactions that are otherwise successful. If a tax avoidance scheme does not work independently of GAAR there is no need to invoke GAAR.
[48] ….[GAAR] is an extreme sanction. It should not be used routinely every time the Minister gets upset just because a taxpayer structures a transaction in a tax effective way, or does not structure it in a manner that maximizes the tax.
Tax Court of Canada – D.G.H. Bowman, Geransky v. The Queen, February 19, 2001
[42] Simply put, using the specific provisions of the Income Tax Act in the course of a commercial transaction, and applying them in accordance with their terms is not a misuse or an abuse. The Income Tax Act is a statute that is remarkable for its specificity and replete with anti-avoidance provisions designed to counteract specific perceived abuses. Where a taxpayer applies those provisions and manages to avoid the pitfalls the Minister cannot say “Because you have avoided the shoals and traps of the Act and have not carried out your commercial transaction in a manner that maximizes your tax, I will use GAAR to fill in any gaps not covered by the multitude of specific anti-avoidance provisions”.
[43] That is not what GAAR is all about.
Tax Court of Canada – P. Archambault, Rousseau-Houle v. The Queen, March 23, 2001
[50] In enacting section 245 of the Act, Parliament was seeking to counter the use of schemes that create an undue tax benefit for taxpayers. The intent was not, however, to permit the Minister to force taxpayers to structure their transactions in the most costly way possible from a tax standpoint. In the explanatory notes for the new section 245 that accompanied the bill to amend the Act, the Minister of Finance recognized that a taxpayer is entitled to arrange his affairs so as to pay the least tax possible. Section 245 is a powerful tool to discourage and prevent flagrant abuses in the application of the Act. It may not be used by the Minister as a means to force taxpayers to structure their transactions in the way most favourable to the tax authorities.
Tax Court of Canada – P.Archambault, Produits Forestiers Donohue Inc. v. The Queen, June 13, 2001
[80] In my view, there is nothing in the Act that bars a taxpayer from realizing a loss on a corporation’s securities sold to third parties (which are dealing with the corporation at arm’s length), even if a significant portion of the assets that belonged to the corporation and to which the loss on the shares may be attributed remains within the group of corporations.
Tax Court of Canada – Campbell Miller, Canada Trustco Mortgage Company v. The Queen, May 7, 2003
[93] This is one of those paradoxes where the sheer complexity of the series of transactions involving many players tweaks the nose upward on that least scientific of analysis known, in tax vernacular, as the smell test, yet legislation and case precedent guide analysis down a more structured and deliberate path past the olfactory sense and into the more certain realm of reason, though less precise purview of policy, where the GAAR debate, in this case, rages.
Supreme Court of Canada – Beverley McLachlin and John Major, Mathew v. Canada, October 19, 2005
[62] The abusive nature of the transactions is confirmed by the vacuity and artificiality of the non-arm’s length aspect of the initial relationship between [the] Partnership and Standard Trust Company.
[44] The heart of the analysis under s. 245(4) lies in a contextual and purposive interpretation of the provisions of the Act that are relied on by the taxpayer, and the application of the properly interpreted provisions to the facts of a given case. The first task is to interpret the provisions giving rise to the tax benefit to determine their object, spirit and purpose. The next task is to determine whether the transaction falls within or frustrates that purpose. The overall inquiry thus involves a mixed question of fact and law. The textual, contextual and purposive interpretation of specific provisions of the Income Tax Act is essentially a question of law but the application of these provisions to the facts of a case is necessarily fact-intensive.
[45] This analysis will lead to a finding of abusive tax avoidance when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent. As well, abusive tax avoidance will occur when a transaction defeats the underlying rationale of the provisions that are relied upon. An abuse may also result from an arrangement that circumvents the application of certain provisions, such as specific anti-avoidance rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions. By contrast, abuse is not established where it is reasonable to conclude that an avoidance transaction under s. 245(3) was within the object, spirit or purpose of the provisions that confer the tax benefit.
[66] The approach to s. 245 of the Income Tax Act may be summarized as follows:
1. Three requirements must be established to permit application of the GAAR:
- A tax benefit resulting from a transaction or part of a series of transactions (s. 245(1) and
- that the transaction is an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit; and
- that there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.
2. The burden is on the taxpayer to refute (1) and (2), and on the Minister to establish (3).
3. If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer.
4. The courts proceed by conducting a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at a purposive interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context of the whole Act.
5. Whether the transactions were motivated by any economic, commercial, family or other non-tax purpose may form part of the factual context that the courts may consider in the analysis of abusive tax avoidance allegations under s. 245(4) . However, any finding in this respect would form only one part of the underlying facts of a case, and would be insufficient by itself to establish abusive tax avoidance. The central issue is the proper interpretation of the relevant provisions in light of their context and purpose.
6. Abusive tax avoidance may be found where the relationships and transactions as expressed in the relevant documentation lack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit, or where they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions.
7. Where the Tax Court judge has proceeded on a proper construction of the provisions of the Income Tax Act and on findings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error.
[69] “…. the practical burden of showing that there was abusive tax avoidance lies on the Minister. The abuse of the Act must be clear, with the result that doubts must be resolved in favour of the taxpayer. The analysis focusses on the purpose of the particular provisions that on their face give rise to the benefit, and on whether the transaction frustrates or defeats the object, spirit or purpose of those provisions.”
Supreme Court of Canada – Rothstein, Copthorne Holdings Ltd. v. Canada, December 16, 2011
[65] The most difficult issue in this case is whether the avoidance transaction was an abuse or misuse of the Act . The terms “abuse” or “misuse” might be viewed as implying moral opprobrium regarding the actions of a taxpayer to minimize tax liability utilizing the provisions of the Income Tax Act in a creative way. That would be inappropriate. Taxpayers are entitled to select courses of action or enter into transactions that will minimize their tax liability (see Duke of Westminster).
[66] The GAAR is a legal mechanism whereby Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer. While the taxpayer’s transactions will be in strict compliance with the text of the relevant provisions relied upon, they may not necessarily be in accord with their object, spirit or purpose. In such cases, the GAAR may be invoked by the Minister. The GAAR does create some uncertainty for taxpayers. Courts, however, must remember that s. 245 was enacted “as a provision of last resort” (Trustco, at para. 21).
[70] The object, spirit or purpose can be identified by applying the same interpretive approach employed by this Court in all questions of statutory interpretation — a “unified textual, contextual and purposive approach” (Trustco, at para. 47; Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3, at para. 26). While the approach is the same as in all statutory interpretation, the analysis seeks to determine a different aspect of the statute than in other cases. In a traditional statutory interpretation approach the court applies the textual, contextual and purposive analysis to determine what the words of the statute mean. In a GAAR analysis the textual, contextual and purposive analysis is employed to determine the object, spirit or purpose of a provision. Here the meaning of the words of the statute may be clear enough. The search is for the rationale that underlies the words that may not be captured by the bare meaning of the words themselves. However, determining the rationale of the relevant provisions of the Act should not be conflated with a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do.
[71] Second, a court must consider whether the transaction falls within or frustrates the identified purpose (Trustco, at para. 44). As earlier stated, while an avoidance transaction may operate alone to produce a tax benefit, it may also operate as part of a series of transactions that results in the tax benefit. While the focus must be on the transaction, where it is part of a series, it must be viewed in the context of the series to enable the court to determine whether abusive tax avoidance has occurred. In such a case, whether a transaction is abusive will only become apparent when it is considered in the context of the series of which it is a part and the overall result that is achieved (Lipson, at para. 34, per LeBel J.).
[72] The analysis will then lead to a finding of abusive tax avoidance: (1) where the transaction achieves an outcome the statutory provision was intended to prevent; (2) where the transaction defeats the underlying rationale of the provision; or (3) where the transaction circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose (Trustco, at para. 45; Lipson, at para. 40). These considerations are not independent of one another and may overlap. At this stage, the Minister must clearly demonstrate that the transaction is an abuse of the Act, and the benefit of the doubt is given to the taxpayer.
Tax Court of Canada – P. Boyle, Spruce Credit Union v. The Queen, October 15, 2012
[77] There is no difference between the two terms “abuse” and “misuse”. The GAAR will apply if an avoidance transaction is abusive. Given the significance of the Duke of Westminster principle in Canadian tax law, the GAAR does not authorize or require a search for reproachably or disgracefully obtained tax savings, and the term abusive is not used in the sense of implying any other moral opprobrium. Canadians are free to be creative in their pursuit of tax savings (Copthorne).
Tax Court of Canada – C. Miller, Birchcliff Energy Ltd. v. The Queen, December 20, 2012
[15] GAAR is a unique piece of legislation in that it allows the Government to bypass provisions of the Act based on an abuse of Policy, a Policy that it is up to the Crown to prove, and then impose whatever consequences it deems reasonable. I do not accept the Crown’s argument that requiring a disclosure in the pleadings of the Policy abused would be opening the doors for the Crown to have to explain its legal interpretation of any provision of the Act. The Supreme Court of Canada has made it clear the Crown must prove a Policy in GAAR cases: it is the integral starting point of a GAAR challenge. It is unlike any other provision of the Act. There is no slippery slope.
Tax Court of Canada – Paul Bédard, Pièces automobiles Lecavalier Inc. v. The Queen, October 2, 2013
[41] From a reading of paragraph 245(3)(b) and the definition of “tax benefit” in subsection 245(1), I note that [Translation] “purely American” tax motivations are in themselves bona fide purposes.
Tax Court of Canada – C. Miller, Carson v. The Queen, November 1, 2013
[10] ….. It is inappropriate to rely on the very specific Anti-Avoidance Rules of the Act for purposes of a general interpretation of all other provisions of the Act.
Tax Court of Canada – P. Boyle, McKesson Canada Corporation v. The Queen, December 13, 2013
[275] There is certainly nothing wrong with taxpayers doing tax-oriented transactions, tax planning, and making decisions based entirely upon tax consequences (subject only to GAAR which is not relevant to this appeal). The Supreme Court of Canada reminds us regularly that the Duke of Westminster is alive and well and living in Canada.
Tax Court of Canada – R. Hogan, Descarries v. The Queen, March 7, 2014
[49] It is well established that the GAAR may apply if the transactions at issue frustrate the object, spirit or purpose of a specific anti-avoidance rule.
Tax Court of Canada – R. Hogan, Birchcliff v. The Queen, October 1, 2015
[111] While tax planning does not necessarily bring into play the GAAR, this is a case where the proverbial elastic was stretched beyond its breaking point.
The Fiscal Artist, Formally Known as Emjayo’see, November 19, 2015
“Tax avoidance and tax evasion are polar opposites. The latter requires a complete disregard for the law, while the former requires strict adherence to the law” (excerpt from “GAAR, The Musical”, Act I, Scene 2).
Tax Court of Canada – E. Rossiter, 594710 British Columbia Ltd. v. The Queen
[1] This case concerns a tax plan allegedly straddling the line between astute and abusive tax avoidance.
[81] However, I note at the outset a fatal shortcoming of the Respondent’s argument; it fails to fully analyze the provisions associated with the obtaining of the tax benefit. It is those provisions that must be interpreted textually, contextually and purposively. As held in Copthorne, “[w]hat is not permissible is basing a finding of abuse on some broad statement of policy, such as anti-surplus stripping, which is not attached to the provisions at issue.”[31] LeBel J. in Lipson emphasized again the importance of identifying the provisions associated with the tax benefit and to consider whether those provisions were abused.[32]
[165] Furthermore, I consider that the jurisprudence provides protection against thwarting Parliamentary intent in the manner contemplated by the Supreme Court. I note the holding by the Federal Court of Appeal in Lehigh that:[70]
37 […] the fact that an exemption may be claimed in an unforeseen or novel manner, as may have occurred in this case, does not necessarily mean that the claim is a misuse of the exemption. It follows that the Crown cannot discharge the burden of establishing that a transaction results in the misuse of an exemption merely by asserting that the transaction was not foreseen or that it exploits a previously unnoticed legislative gap. As I read Canada Trustco, the Crown must establish by evidence and reasoned argument that the result of the impugned transaction is inconsistent with the purpose of the exemption, determined on the basis of a textual, contextual and purposive interpretation of the exemption.
[Emphasis added]
[166] Indeed, in Lehigh and in Gwartz the Crown failed to discharge that burden of demonstrating that the appeal in that case involved such a result. The analogy that the Crown seeks to draw is between the case at bar and the exemptions at play in those appeals, where there was no ambiguity as to whether the taxpayer qualified for the exemption. In Lehigh, for instance, the FCA stated that a transaction could abuse such a bright line test.[71]
Tax Court of Canada – C. Miller, Golini v. The Queen
[1] Tax Planning – one side calls it “structured transactions”, while the other side calls it “smoke and mirrors”. Certainly there is a spectrum, and it is for me to determine where the Golini transactions fall on that spectrum.
[140] The Act is comprehensive: it has grown to be a mammoth tome attempting to cover every possible situation that taxpayers and their planners can concoct to minimize taxes – and concoct they do. Fearing plans were outwitting the legislation, the GAAR was introduced as an overriding general anti‑avoidance provision. This was not to deny a taxpayer’s right to arrange affairs to minimize taxes, but to ensure such was done within the spirit of the law, hopefully saving the need for several hundred more pages of legislation to cover off more and more complex plans. And the plans continued, in the Fisc’s eyes skirting with legitimacy, and thus the non‑legislative concept of sham got life. In these reasons I am simply attempting to make a common sense interpretation of the legislation without resort to the more nebulous concepts of sham or spirit of the law that admittedly can tie us all in knots.
More coming soon….
GAARMAGEDDON™