General Anti-Avoidance Rule

AuthorVern Krishna
ProfessionProfessor of Common Law, University of Ottawa Barrister at Law
gener aL
anTI‑avoIdance ruLe
Lawyers us e the law as shoemakers use le ather: 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
Individuals have sought to avoid taxes for as long as k ings and gov-
ernments have levied t hem. 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 hi s citizens who swam across the loca l
river to avoid the toll tax on the local bridge. The king re sponded im-
mediately by making s wimming across the river illegal the f‌irst tax
anti-avoidance rule in histor y.
It is a fundamental pri nciple of Anglo-Canadian law that a t ax-
payer is entitled to arra nge his affairs to minimize tax.1 This principle,
generally known as the Westminster pri nciple, 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 v Canada, 2005
SCC 54 at para 30 [Canada Trustco].
Income Tax L aw470
start with t he premise that the avoidance of tax is perfectly legitimate.
As Learned H and J said:2
Over and over again court s have said that there is nothing s inister in
so arrang ing one’s affairs as to keep ta xes as low as possible. Every-
body does so, rich or poor; and a ll do right, for nobody owes any
public duty to pay more than t he law demands: taxes are e nforced
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 speci f‌ic to certain types of transactions;3 others
are broad and stated as general principles. The General A nti-Avoidance
Ru le (G AA R)4, a broadly stated statement of principle of statutory con-
struction that affect s both domestic and international tax planning, is
the apex of all anti-avoidance measures.
Although a person is entitled to ar range her affairs so as to reduce
tax, this right is subject to a proviso that the arra ngement constitutes
lawful ta x mitigation. What constitutes lawful ta x mitigation? The
answer to this seemingly simple question is fraught with uncerta inty.
By def‌inition, all tax planning involves tax minimization. But at what
point does one cross over from acceptable tax mitigation to unaccept-
able tax avoid ance?
Tax mitigation that is not subject to GAAR is “lawful.” Tax avoidance
that is caught by GAAR i s “unlawful.” The distinction between what is
“lawful” and “unlawful” depends upon t axpayer motive, the rationale of the
particular st atutory provision(s) and the underlying structure of t he Act.
We see this in the decisions of the Supreme Court: Canada Trustco Mort-
gage Co v Canada (Canada Tr ustco), 5 Mathew v Canada6 and Lipson v Can ada.7
Judicial attitudes towards t ax 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 ta x 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 Rule 471
principle in the heyday of laissez-faire economics; the hardening of at-
titudes after the Second World War and a lessening tolerance towards
arrangements th at curtailed public revenues. For example, we see the
beginning of the ch ange in sentiment towards tax avoidance in Lord
Greene’s speech in Lord Howard de Walden v IRC:
For years a battle of manoeuv re has been waged between t he 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 Legislat ure has often been worsted by the ski ll, determination
and resourceful ness 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 se verest of penalties. It scarcely l ies in the mouth of
the taxp ayer who plays with f‌ire to complain of bur nt f‌ingers.8
And a year later in Viscount Simon’s speech in Latilla v IRC:
[T]here is, of course, no doubt that t hey are within their lega l rights,
but that is no reason why t heir efforts, or those of the profess ional
gentlemen who assist t hem in the matter, should be regarded as a
commendable exercise of i ngenuity or as a discharge of the dutie s 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 virt ue.10
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).
10 Re 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).

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