The Supreme Court of Canada and the General Anti-Avoidance Rule: Canada Trustco and Mathew
| Author | David G. Duff |
| Profession | Associate Professor, Faculty of Law, University of Toronto |
| Pages | 1-46 |
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The Supreme Court of Canada and the
General Anti-Avoidance Rule:
Canada Trustco and Mathew
david g. duff*
A. INTRODUCTION
On October , the Supreme Court of Canada relea sed the first deci-
sions in which it has considered t he general anti-avoidance rule (GAA R)
in section of the feder al Income Tax Act (ITA). Effective for transac-
tions entered into on or after Septemb er , this rule was enac ted as
a deliberate response to the Supreme Cou rt of Canada decision in Stubart
Investments Lt d. v. e Queen, and intended to reduce what the Court had
described a s “the action and re action endles sly produced by complex, spe-
cific tax meas ures aimed at sophist icated business pract ices, and the in-
evitable, professionally g uided and equal ly speciali zed taxpayer reaction.”
* Associate Profes sor, Faculty of Law, University of Toronto. is chapter wa s originally
published in () : Bul letin for Internationa l Fiscal Documentation –.
R.S.C. , c. (th Supp.) (as amende d).
Stubart Invest ments Ltd. v. e Queen, [] C.T.C. , D.T.C. (S.C.C.)
[Stubart]. Although rejecting the traditional “strict construction” approach to the
interpretation of t ax statutes, the Stubar t decision also reaffirme d the traditional ap-
proach adopted in C.I .R. v. Duke of Westminster, [] A.C. (H.L.) [West min ste r] that
tax consequence s should be based on the legal ch aracter of transac tions and relation-
ships regardles s of their economic or commercia l substance and the absence of a ny
non-tax purpos e for their existence.
Stubart,ibid. at para. , c ited in Canada, Depar tment of Finance, Tax Reform :
Economic and Fiscal Outlook (Ottawa: Department of Fin ance, June ), repro-
duced in White Pap er on Tax Reform (Toronto: CCH Canada Ltd., ) at .
2 DavidG.Duff
Designed “to disting uish between legit imate tax plann ing and abusive tax
avoidance,” the GAAR oper ates to deny a “tax benefit” that wou ld other-
wise result f rom an “avoidance trans action” or “series of tran sactions” of
which the avoidance transac tion is a part; the transac tion must also result
in a misuse of provision s of the ITA, the Income Tax Regulations, the In-
come Tax Application Rules, a tax t reaty, or any other relevant enact ment,
or an abuse having regard to t hose provisions read as a whole.
Although the ITA defines the concepts of a t ax benefit, an avoidance
transaction, and a series of tran sactions, it is up to the courts to decide
Hon. Michael H. Wil son, Minister of Fina nce, Explanatory Notes to Legisl ation Relat-
ing to Income Tax (June ) at [Explanator y Notes].
See subs . () of the ITA, according to which: “Where a t ransaction is an avoida nce
transact ion, the tax consequences t o the person shall be determ ined as is reasonable
in the circum stances in order to deny a tax b enefit that, but for this sec tion, would
result, dire ctly or indirect ly, from that transaction or f rom a series of transact ions that
includes that tra nsaction.” See also su bs. () of the ITA, which sets out variou s ways
in which the ta x consequences to a person may be deter mined in order to deny a tax
benefit that would other wise result from an avoida nce transaction.
ITA, subs. (). As origina lly enacted, thi s provision stipulated t hat the GAAR would not
apply to a transac tion “where it may reasonably be conside red that the transac tion would
not result direc tly or indirectl y in a misuse of the provi sions of this Act or an abu se having
regard to the provis ions of this Act, other t han this sect ion, read as a whole.” Subsection
() was amended in , with ret roactive application to the dat e when the GAAR
came into effect , by specifyi ng that the GAAR would appl y to a misuse or abuse of the In-
come Tax Regulation s, the Income Tax Application Ru les, a tax treaty, or any ot her relevant
enactment, as wel l as the ITA, and by converting t he double negative language of t he initial
provision to a positive t est stipulating th at the GAAR “applies to a tra nsaction only if it
may reasonably be cons idered that the trans action … would … result … in a m isuse … or …
abuse.” e implications of t his amendment are considere d later in this comment.
See subs. () of the ITA, wh ich defines a “tax benefit” as “a reduc tion, avoidance, or
deferral of tax or ot her amount payable under this Ac t or an increase in a refu nd of tax
or other amount under th is Act” including “a reduct ion, avoidance or deferral of ta x or
other amount that wou ld be payable under this Act but for a t ax treaty or an increa se in
a refund of tax or ot her amount under this Act a s a result of a tax treaty.”
See subs. () of the ITA, which defines an avoidance tr ansaction as “any tr ansaction
(a) that, but for this sec tion would result, di rectly or indirec tly, in a tax benefit, un less the
transact ion may reasonably be considered to have b een undertaken or arra nged primarily
for bona fide purpose s other than to obtain t he tax benefit; or (b) that is pa rt of a series of
transact ions, which series, but for t his section, would res ult, directly or i ndirectly, in a tax
benefit, unless t he transaction may rea sonably be considered to have been u ndertaken or
arranged pri marily for bona fide pur poses other than to obt ain the tax benefit.” See a lso
subs. () of the ITA, which defines a “t ransaction” to include “an a rrangement or event.”
See subs. () of the ITA, which st ipulates that a series of t ransactions is “ deemed to
include any related tr ansaction or events completed i n contemplation of the series.”
The Supreme Cour t of Canada and the Gene ral Anti-Avoid ance Rule 3
if these requirements are satisfied in the context of spe cific transac tions
and whether an avoidance tran saction results in a m isuse or abuse with in
the meaning of t he statutory rule. I n its unani mous decisions in Canada
Trustco Mortgage Company v. Canada and Mathew v. Canada, the Su-
preme Court of Canada considers each of t hese issues, providing importa nt
guidance on the interpret ation and application of the GAAR.
is comment reviews t he decisions in Canada Trustco and Mathew
in light of previous Supreme Cou rt of Canada tax jurisprudence and lower
court pronouncement s on the operation of t he GAAR. Section B outl ines
the facts of each case a nd the grounds on which the Crown soug ht to ap-
ply the GAAR. S ection C summar izes the decision s reached in each case
by the Tax Court of Canada and t he Federal Court of Appea l. Section D
examines the Supreme Cou rt of Canada decisions, considering the C ourt’s
general approach to tax law and the GA AR and its applicat ion of this ap-
proach to the facts of each case. Se ction E summari zes the conclusions of
this examination.
B. FACTS
Like many tax avoidance ca ses, the transactions at is sue in Canada Trustco
and Mathew are numerous and complex. Canada Trustco involved a lever-
aged sale-lease back of depreciable propert y, as a result of which the t axpayer
sought to defer tax on leasing i ncome by deducting capital cost a llowance
(CCA) in respect of proper ty for which it assumed lit tle or no economic
risk. Mathew involved several trans actions through which a n insolvent
trust company sought to tr ansfer accrued losses on va rious mortgages to
arm’s length purchasers throug h the use of a partnership.
1) Canada Trustco
In Canada Trustco, the taxpayer was a large diversified fina ncial institu-
tion holding a portfolio of loa ns and leases to government agencies a nd
large companies. In order to obtain additional CCA deductions to shelter
leasing income that it anticipated, it entered into a number of transactions
Canada Trustco Mortgage Company v. Canada, SCC [Canada Trustco].
Mathew v. Canada, SCC [Mathew].
Canada Trustco Mo rtgage Company v. e Queen, [] CTC , DTC
(TCC) at para. .
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