Designing and Implementing a Target-Effective General Anti-Avoidance Rule

• Author: Tim Edgar
• Pages: 221-258

221

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Designing and Implementing a Target-Effective

General Anti-Avoidance Rule

tim edgar*

A. CLARIFYING THE CONCEPTS OF “ACCEPTABLE” AND “ABUSIVE”

TAX AVOIDANCE

e general anti-avoidance rule (GAAR) in section  of the Income Tax

Actwas enacted i n  in an apparent ef‌fort to force the Canadia n judi-

ciary to dis charge more fully t heir responsibilit y to control tax avoidance.

At the core of the GAAR is a n accepted distinct ion between “acceptable”

and “abusive” tax avoidance. In mak ing this di stinction, the GAA R f‌irst

def‌ines avoidance behaviour in terms of transactions that are undertaken

primarily to obt ain a tax benef‌it. An exercise in statutory interpretation is

then invoked to charac terize avoidance behaviour as acc eptable or abusive.

More particu larly, “abusive” tax avoidance is def‌ined as avoida nce behav-

iour that constitutes a m isuse of a provision of the Act or a n abuse of the

* Faculty of Law, e Universit y of Western Ontario, London, and the Taxat ion Law

and Policy Resea rch Institute, Monash Uni versity, Melbourne. e author would li ke

to thank Dan iel Sandler and David Du f‌f for helpful comments on an earl ier draft.

Research assi stance was provided by Oni rik Sarma throug h a BLG Summer Research

Fellowship.

 RSC , c.  (th Supp.), as amended [the Act]. Unless ot herwise stated, st atutory

references in this c hapter are to the Act.

 e relevant transaction m ay be either a stand-alone tra nsaction or a trans action that

is part of a serie s of transactions.

222 Tim Edgar

provisions of the Act read as a whole. By deriv ation, “acceptable” avoid-

ance behaviour is that which doe s not constitute a misuse or abuse.  Giv-

ing meaning to t he relevant legislative regime, which is the fu nction of the

statutory interpretation exercise , is thus paramount in drawing the t ax-law

boundary bet ween “acceptable” and “abusive” avoidance.

In the view of some at least,

 the execution of this accepted distinc-

tion by the Canadian judiciary has created an overly broad category of ac-

ceptable tax avoidance and, by derivation, a n under-inclusive category of

abusive tax avoidance. e dist inction itself apparent ly follows from the

judicial propos ition that taxpayers have the r ight to arrange thei r af‌fairs to

pay the least amount of ta x. e category of “abusive” tax avoidance appears

to overlay this prop osition by def‌ining a range of avoid ance behaviour that

lies outside the judicia lly created “right” of tax payers to structure thei r af-

fairs with ta x in mind. But as framed by the judicia ry and the tax literatu re

as the outcome of an exercise in st atutory interpretation, t he distinct ion

between acceptable and abusive ta x avoidance appears hopelessly unclear.

Because of a failu re to precisely def‌ine the concept, appeal s to “economic

substance” as a benchmark aga inst which the correct ness of judicial de-

cision-making can b e assessed only seem to muddy fu rther the statutor y

morass that has congealed around this distinction. It is argued here that

 e misuse or abuse requir ement extends to the provisions of : () the Income Tax

Regulations; () the Income Tax Appl ication Rules; () a tax treat y; or () any other

enactment relevant i n computing tax or any other amou nt payable by or refundable to

a person under the Act (inc luding the determinat ion of any amount that is releva nt for

the purposes of s uch computation).

 e term “acceptable tax avoida nce” sometimes appears in t he form of other judicial

euphemisms, such a s “tax mitigation” or “tax m inimization.” Compa rable euphemisms

for “abusive tax avoidance ” are “contrived” or “arti f‌icial” trans actions.

 See, for ex ample, Brian J. Arnold, “Con fusion Worse Confounded —e Supreme

Court’s GAA R Decisions” ()  Can. Tax J. –; and Bria n J. Arnold, “e

Long, Slow, Steady Demis e of the General Anti-Avoidance Rule” ()  Can . Tax J.

–. Arnold has b een one of the more prominent and vocal cr itics of the applica-

tion of the GAAR by the Canadian judiciary.

 See, in thi s respect, David Weisbach, “Ten Truths about Tax Shelter s” ()  Tax

L. Rev.  at – (arguing that, f rom a consequential persp ective, tax-avoidance

transact ions are not about statutor y interpretation, nor is there a ny constitutionall y

enshrined ri ght of taxpayers to min imize tax payable, wh ich would bind tax polic y-

makers in responding to such transactions).

 For recent disc ussions of the relevance of “economic s ubstance” in the contex t of the

GAAR and ta x avoidance generally, see Arnold, “C onfusion Worse Confounded,” above

note ; and Jinyan Li , “‘Economic Substance’: Draw ing the Line Between L egitimate

Designing and Implementing a Target-Effective General Anti-Avoidance Rule 223

a more self-conscious normative perspective, focused on the consequen-

tial attributes of t ax avoidance behaviour, can provide the basis for a much

more precise identif‌ication of the r ange of prohibited behaviour subject to a

GAAR; it can al so provide the basis for a precise articul ation of the content

of the meaning of econom ic substance and its releva nce to the identif‌ica-

tion exercise.

A consequential perspec tive focuses on the ef‌f‌iciency a nd income/

wealth distribution ef‌fects of tax avoidance behaviour. In this respect, the

following t wo, relatively straig htforward, propositions c an be posited:

Tax policymakers must f‌irst acqu ire a sense of the ef‌f‌iciency and in-

come/wealth-distribution ef‌fects that make tax-avoidance transac-

tions problematic.

Tax policymakers must then identi fy legislatively the ra nge of prob-

lematic tran sactions at a n acceptable admi nistrat ive cost. In shor t,

tax policymakers must assess the target ef‌fectiveness of general

anti-tax-avoidance rules or doctrines that are articulated as possible

responses to the ra nge of transac tions identif‌ied as problematic be-

cause of their consequent ial attributes.

ere is nothin g special ab out these two propo sitions. ey revea l

the somewhat obvious point that a pol icy analysi s of tax avoidance is no

dif‌ferent than the a nalysis of any other t ax policy is sue. In the context of

the GAAR and anti-tax-avoidance doctrines generally, resolution of this

f‌irst polic y proposition is su rprisin gly easy. e cons equential at tributes

of all tax avoida nce behaviour requ ire a legislative resp onse of some sort

intended to eliminate such behaviour. Resolution of the identif‌ication issue

is the more dif‌f‌icult exerci se. It is in this respect that the GAA R in its cur-

rent form may be characterized as u nder-inclusive and thus “sick.” But this

characterizat ion holds primarily i n the application of the GAAR to two of

three general t ypes of tax-avoidance transactions that a re the daily grist of

some tax prac titioners: that is, those transactions that () attempt to cre-

Tax Minimi zation and Abusive Tax Avoidance” ()  Can. Tax J. –. See a lso

Chapter  in thi s text.

 See, for example, Jo seph Bankman, “e Bu siness Purpose Doc trine and the Sociolog y

of Tax” ()  SMU L. Rev.  at , who disti nguishes “tax ba r lawyers” from “the

tax shelter bar ” in the sense that the for mer structure “real dea ls,” while the latter “ deal

with art if‌icially contrive d deals.” Tax-avoidance transact ions that attempt to create a

tax attr ibute or trade a tax attri bute are equivalent to Ba nkman’s artif‌ici ally contrived

deals. Tax-avoidance tra nsactions that subs titute a lower-taxed tran saction for a

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