GAAR And the Supreme Court of Canada: The Road To Nowhere
| Author | Daniel Sandler |
| Profession | Professor |
| Pages | 430-469 |
Chapter Eighteen
GAAR and the Supreme Court
of Canada: The Road to
Nowhere
Daniel Sandler*
The general anti-avoidance rule in section 245 of the Income Tax Act1(affec-
tionately known as GAAR) has been on the statute books for over 15 years.
It has been the subject of approximately twenty court cases, eight of which
have been decided by the Federal Court of Appeal.2The Supreme Court of
430
* I am grateful to Tim Edgar for his comments.
1 R.S.C. 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unless oth-
erwise stated, statutory references in this chapter are to the Act.
2 The eight cases decided by the Federal Court of Appeal are: OSFC Holdings Ltd. v. The
Queen, 2001 D.T.C. 5471, [2001] 4 C.T.C. 82 [OSFC]; Canadian Pacific Ltd. v. The Queen,
2002 D.T.C. 6472 [CP]; Duncan v. The Queen, 2002 D.T.C. 7172, [2002] 4 C.T.C. 1
[Duncan]; Produits Forestiers Donohue Inc. v. The Queen, 2002 D.T.C. 7512 [Donohue];
Jabin Investments Ltd. v. The Queen, 2003 D.T.C. 5027, [2003] 2 C.T.C. 25 [Jabin]; Math-
ew et al. v. The Queen, 2003 D.T.C. 5644, [2004] 1 C.T.C. 115 [Mathew]; The Queen v.
Imperial Oil Limited, 2004 D.T.C. 6044, [2004] 2 C.T.C. 190 [Imperial Oil]; and The
Queen v. Canada Trustco Mortgage Company, 2004 D.T.C. 6119 [Canada Trustco].
A ninth case decided by the Federal Court of Appeal, S.T.B. Holdings Ltd. v. The
Queen, 2002 D.T.C. 7450, [2003] 1 C.T.C. 36 [S.T.B.], concerned a preliminary issue:
whether subsection 245(7) of the Act requires that reference to GAAR be made on the
face of the notice of assessment or reassessment [the court held that it did not, con-
cluding that subsection 245(7) was applicable only to third parties seeking tax relief
following a reassessment of another taxpayer under GAAR].
There are also a number of GAAR cases currently on appeal to the Federal Court
of Appeal.
Canada recently granted leave in its first two GAAR cases.3This paper con-
siders the judicial attitude to GAAR, specifically the approach that the
Supreme Court of Canada will likely take in a GAAR case. In my view, the
judicial attitude to GAAR is tied very much to the judicial attitude to tax
avoidance generally and there appears to be little consensus among judges
about the role, if any, of the judiciary in combating tax avoidance. Without
giving too much away at the outset, the comments of Iacobucci and Bas-
tarache, JJ. in the recent decision of Stewart v. The Queen4speak volumes
about the approach that the Supreme Court of Canada will likely take to
GAAR: there is “a distinction between judicial interpretation and judicial
rule-making” and tax law “is sufficiently complicated without unhelpful
judicial incursions into the realm of lawmaking.”5These remarks seem to
reflect the view of the Supreme Court of Canada regarding the judiciary’s
role in tax avoidance cases, which has been made abundantly clear in
recent years: the court should not be quick to embellish provisions of the
Act in response to concerns about tax avoidance; it is Parliament’s job to be
“precise and specific with respect to any mischief to be prevented.”6And to
conclude this train of thought, GAAR is hardly a model of precision or
specificity.
A. “AND YOU MAY ASK YOURSELF — WELL . . . HOW DID I
GET HERE?”7
Beginning with the 1984 decision in Stubart Investments Ltd. v. The Queen,8
and more particularly in the past decade, the Supreme Court of Canada has
emasculated virtually all judicial anti-avoidance doctrines, to the point where
little remains beyond sham and legally ineffective transactions, both of
GAAR and the Supreme Court of Canada: The Road to Nowhere 431
3 Leave to appeal was granted to the taxpayers in Mathew, [2003] S.C.C.A. No. 538 (June
24, 2004) and to the Crown in Canada Trustco, [2004] S.C.C.A. No. 157 (June 24,
2004). Previously, the Supreme Court of Canada denied leave to appeal (without rea-
sons) in two substantive GAAR cases: OSFC, [2001] S.C.C.A. No. 522 (June 20, 2002)
and Duncan, [2002] S.C.C.A. No. 386 (March 20, 2003) The Supreme Court of Cana-
da also denied leave (without reasons) in S.T.B., [2002] S.C.C.A. No. 513 (March 27,
2003).
5Ibid., at paras. 42–43.
6Ludco Enterprises Ltd. et al. v. The Queen, 2001 D.T.C. 5505, [2002] 1 C.T.C. 95 (S.C.C.)
[Ludco], at para. 39.
7 Talking Heads, “Once in a Lifetime,” from the album, Once in a Lifetime (1984).
which are narrow in scope and easily avoided with proper planning.9At the
same time, the Supreme Court has also undermined the scope of a number
of more general statutory provisions that could play a roll in minimizing
“abusive” tax avoidance, particularly the limitations on interest deduction in
paragraph 20(1)(c) and the general expense limitation in section 67. The
remainder of this section considers the demise of the various judicial doc-
trines and these two statutory provisions as effective anti-avoidance tools.
1) A General Business Purpose Test
In Stubart, the Supreme Court of Canada firmly rejected a general business
purpose test for Canada. While rejecting a business purpose test, Estey, J.
indicated that the “modern approach” to statutory interpretation applied to
the Act (as it did to all other statutes in Canada) and that the “object and
spirit” test that he espoused in that case would “reduce the attraction of
elaborate and intricate tax avoidance plans, and reduce the rewards to those
best able to afford the services of the tax technicians.”10
2) The “Object and Spirit” Test
GAAR was introduced in the aftermath of Stubart,11 suggesting that Parlia-
ment did not share Estey, J.’s view of the object and spirit test as an effec-
ADVOCACY AND TAXATION IN CANADA432
9 Sham is more closely tied to tax evasion than to tax avoidance. According to the
Supreme Court of Canada in Stubart (at para. 50), sham is limited to its classic defini-
tion, from Snook v. London & West Riding Investments Ltd., [1967] 2 Q.B. 786 at 802
(C.A.): “acts done or documents executed by the parties . . . which are intended by
them to give to third parties or to the court the appearance of creating between the
parties legal rights and obligations different from the actual legal rights and obliga-
tions (if any) which the parties intend to create.” In essence, a sham involves an ele-
ment of deceit on the part of the taxpayer. Even aggressive tax planning, properly
structured, is not designed to deceive.
A legally ineffective transaction is a technically defective transaction: the taxpayer
missed some essential legal formality when carrying out the transactions or the trans-
actions were not carried out on a timely basis. Again, the doctrine is narrow in scope.
Provided that the taxpayers create legally binding transactions and dot their “i”s and
cross their “t”s, it is highly unlikely that the planning will be considered legally inef-
fective. How technically defective the transactions must be before the doctrine applies
remains unclear. For example, in Continental Bank of Canada v. The Queen, 98 D.T.C.
6505, [1998] 4 C.T.C. 119 (S.C.C.) [Continental Bank], the fact that the bank was pre-
cluded from investing in a partnership under section 174(2)(i) of the Bank Act did not
preclude the Supreme Court of Canada from concluding that a partnership existed.
10 Stubart, at para. 56.
11 See, generally, Brian J. Arnold and James R. Wilson, “The General Anti-Avoidance
Rule — Part 1” (1988) 36: 4 Canadian Tax Journal 829 at 837–41.
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