Retroactivity and the General Anti-Avoidance Rule

• Author: Benjamin Alarie
• Pages: 197-219

197

[eight ]

Retroactivity and the

General Anti-Avoidance Rule

benjamin alarie*

A. INTRODUCTION

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

come Tax Act (ITA). e GAAR was introduced in . Motivating its

introduction was the concern expres sed by the Department of Finance be-

fore its debut that “the existi ng provisions of the Income Tax Act are in-

adequate to deal with a number of blatant tax avoidance arrangements.”

e GAAR remedies this inadequacy, at least theoretically, by providing a

ready-made generic statutory basis for denying a “t ax benef‌it” associated

with an “avoidance transaction,”

 provided the avoidance transaction sat-

* Faculty of Law, Universit y of Toronto, and the Taxation Law and Policy Resea rch Insti-

tute, Monash University, Melbourne.

. RSC , c.  (th Supp.).

 S ee David Duf‌f, Canadia n Income Tax Law (Toronto: Emond Montgomery, ) at

–, citing Canad a, Department of Finance, Tax Reform : Economic and Fisc al

Outlook (Ottawa: Depart ment of Finance,  June ).

 Subsection () def‌ines “tax benef‌it ” for the purposes of the GAA R:

“tax benef‌it” mea ns a reduction, avoidance or deferra l of tax or other amount pay-

able under this Act or a n increase in a refund of t ax or other amount under thi s

Act, and includes a reduc tion, avoidance or deferral of ta x or other amount that

would be payable under th is Act but for a tax treaty or a n increase in a refund of

tax or other amount u nder this Act as a result of a t ax treaty.

 Subsec tion () def‌ines “avoidance transac tion” for the purposes of the GA AR:

An avoidance tra nsaction means any tr ansaction

198 Benjamin A larie

isf‌ies the threshold l imitation — the statutor y text of which has be en re-

cently amended — of being a “misuse” or “abuse” of t he ITA, the Income

Tax Regulations, the Income Tax Application Rules , a tax treaty, or any

other enactment relevant to determ ining ta x liabilit y. As the “misuse” or

“abuse” limitation makes clea r, the GAAR is intended to interfere only with

abusive tax avoidance and not legitimate ta x planning, which is consistent

with the De partment of Finance’s orig inal concern with “ blatant tax avoid-

ance arrangements.”

e statutory text of subsec tion (), the basis of the “misuse” or

“abuse” limitation on the den ial of a tax benef‌it a ssociated with a n avoid-

ance transaction, remained unchanged from the time the GAAR f‌irst took

ef‌fect —on  September  —unt il it was amended by the Budget Imple-

mentation Act,,No.  (BIA). e BIA received royal a ssent on  May

. Subsection () of the BIA provided that the a mended language of

subsection () applies “with resp ect to tran sactions entered into after

September , .” Because the amendment to () was made by Par-

liament to apply retroactively to all t ransactions si nce the GAAR was i n-

troduced, it is arguable that the old la nguage of subsection () is now

entirely without purchase.  is paper addresses some of the legal and nor-

mative considerations rel ating to the six teen-year retroact ive ef‌fect of the

amended version of subsection ().

e manner in which the Supreme Cou rt of Canada dealt with the ret-

roactivit y issue in Canada Trustco Mortgage Co. v. Canada is provocative.

Despite the express provision for the retroactive ef‌fec t of the new subsec-

tion () to transactions occur ring after  September , the Court

(a) that, but for this s ection, would result, d irectly or indirec tly, in a tax benef‌it,

unless the tr ansaction may reasonabl y be considered to have been underta ken

or arranged pri marily for bona f‌ide purp oses other than to obtai n the tax

benef‌it; or

(b) that is par t of a series of transact ions, which series, but for th is section, would

result, direc tly or indirectly, in a t ax benef‌it, unless the t ransaction may rea-

sonably be considered to have b een undertaken or arra nged primarily for bona

f‌ide purposes other t han to obtain the ta x benef‌it.

 See Canada, Depart ment of Finance, Tax Reform , above note . See a lso, Peter

Hogg, Joanne Ma gee & Jinyan Li, Princip les of Canadian Income Tax,  th ed. (Toronto:

omson Carswel l, ) at , who remark in a section entit led, “Identifying ‘ Bad’

Avoidance” that “[t]he idea seems to be to exclude from GA AR those trans actions that

are in accordance w ith the object and spirit of t he scheme of the Act.”

 SC , c. , s.  .

Canada Trustco Mortgage Co. v. Canada,  SCC .