General Anti-Avoidance Rule

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 469-512

469

CHAPTER 19

generaL

anTI‑avoIdance ruLe

Lawyers use the law as shoemakers use leather: rubbing it, pressing

it, and stretching it w ith their teet h, all to the end of making it f‌it for

their purpos es.

—Louis XII of France

A. gENERAL COMMENT

Individuals have sought to avoid taxes for as long as kings and gov-

ernments have levied them. Just as rulers — whether democractic or

autocratic — are creative in devising taxes, individuals are innovative

in avoiding them. We see tax planni ng 6,000 years ago in Mes opotamia

when a king imposed f‌ines on his citizens who swam across the local

river to avoid the toll tax on the local bridge. The king responded im-

mediately by making swimming across the river illegal — the f‌irst tax

anti-avoidance rule in history.

It is a fundamental principle of Anglo-Canadian law that a tax-

payer is entitled to arrange his affairs to minimize tax.1 This principle,

generally known as the Westminster principle, is the foundation for tax

avoidance — the reduction of tax payable by lawful means. Thus, we

1 See Explan atory Notes (1988) to GAAR tabled with t he Income Tax Act legisla-

tion at 464, quoted per curiam in Canada Trustco Mortgage Co vCanada, 2005

SCC 54 at para 30 [Canada Trustco].

Income Tax L aw470

start with the premise that the avoidance of tax is perfectly legitimate.

As Learned Hand J said:2

Over and over again court s have said that there is nothing s inister in

so arranging one’s affairs as to keep taxes as low as possible. Every-

body does so, rich or poor; and all do right, for nobody owes any

public duty to pay more than the law demands: taxes are enforced

exactions, not voluntar y contributions. To demand more in the name

of morals is mere cant.

However, statutory restrictions narrow the scope of legitimate tax

planning. Thus, one must distinguish between acceptable tax mitiga-

tion and “abusive” tax avoidance.

Tax provisions to control avoidance vary in scope and intensity.

Some are narrow and specif‌ic to certain types of transactions;3 others

are broad and stated as general principles. The General A nti-Avoidance

Rule (GAAR)4, a broadly stated statement of principle of statutory con-

struction that affects both domestic and international tax planning, is

the apex of all anti-avoidance measures.

Although a person is entitled to arrange her affairs so as to reduce

tax, this right is subject to a proviso that the arrangement constitutes

lawful tax mitigation. What constitutes lawful tax mitigation? The

answer to this seemingly simple question is fraught with uncertainty.

By def‌inition, all tax planning involves tax minimization. But at what

point does one cross over from acceptable tax mitigation to unaccept-

able tax avoidance?

Tax mitigation that is not subject to GAAR is “lawful.” Tax avoidance

that is caught by GAAR is “unlawful.” The distinction between what is

“lawful” and “unlawful” depends upon t axpayer motive, the rationale of the

particular statutory provision(s) and the underlying structure of the Act.

We see this in the decisions of the Supreme Court: Canada Trustco Mort-

gage Co v Canada (Canada Tr ustco),5Mathew v Canada6 and Lipson v Can ada.7

Judicial attitudes towards tax planning ref‌lect a society’s social, pol-

itical and economic values. Thus, case law ref‌lect s the ebb and f‌low of ju-

dicial tolerance towards tax avoidance: the tolerance of the Westminster

2 Commissioner of Inter nal Revenue v Newman, 159 F 2 d 848 at 850–51 (2d Cir

1947).

3 See, for example, the “sup erf‌icial loss” provision s in the Income Tax Act, RSC

1985, c 1 (5th Supp) [ITA], sub para 40 (2)(g)(i).

4 Ibid, s 245.

5 Canada Trustco, above note 1.

6 Mathew v Canada, 2005 SCC 55.

7 Lipson v Canada, 20 09 SCC 1 [Lipson].

General Ant i-Avoidance Rule471

principle in the heyday of laissez-faire economics; the hardening of at-

titudes after the Second World War and a lessening tolerance towards

arrangements that curtailed public revenues. For example, we see the

beginning of the change in sentiment towards tax avoidance in Lord

Greene’s speech in Lord Howard de Walden v IRC:

For years a battle of manoeuvre has been waged between the Legis-

lature and those who a re minded to throw the burden of taxat ion off

their own shoulders on to t hose of their fellow-subjects. In that batt le

the Legislature has often been worsted by the skill, determination

and resourcefulness of its opponents, of whom the present appell ant

has not been the lea st successful. It would not shock us in the least to

f‌ind that the Leg islature has determine d to put an end to the struggle

by imposing the severest of penalties. It scarcely lies in the mouth of

the taxpayer who plays with f‌ire to complain of burnt f‌ingers.8

And a year later in Viscount Simon’s speech in Latilla v IRC:

[T]here is, of course, no doubt that they are within their legal rights,

but that is no reason why their efforts, or those of the professional

gentlemen who assist them in the matter, should be regarded as a

commendable exercise of ingenuity or as a discharge of the duties of

good citizenship.9

Then, Lord Denning’s moral tone in his characteristically terse style:

“The avoidance of tax may be lawful, but it is not yet a virtue.”10

B. TAXPAyERS’ RIgHTS

A taxpayer is ent itled to arrange his affairs so a s to attract the minimum

amount of tax. We identify this principle with Lord Tomlin’s speech in

the House of Lords in IRC v Duke of Westminster:

8 Lord Howard de Walden v IRC, [1942] 1 KB 389 at 397 (CA) (taxpaye r who trans-

ferred asset s to a foreign Canadian comp any liable for income tax and sur tax as

he had the “power to enjoy ” these assets wit hin the meaning of the Fin ance Act).

9 Latilla v IRC, [1943] AC 377 at 381 (HL) (t axpayer unsucces sfully attempted to

reduce British i ncome tax by transfer ring prof‌it to capital; tran saction within s

18 of the Finance Ac t).

10Re Weston’s Settlements; Weston v Weston, [1969] 1 Ch 223 at 245 (C A) (in

making a deter mination whether to var y trusts for the purpo se of avoiding

or reducing tax , court may consider the exp ediency of such a scheme and the

interests of t he benef‌iciaries).