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GAAR at 25: Panelists Discuss Lessons Learned and Challenges

On September 26, 2013, the Canadian Tax Foundation Young Practitioners Group (Toronto) convened a panel discussion titled “GAAR at 25: Lessons Learned & Current Challenges” on the General Anti-Avoidance Rule (“GAAR”) in section 245 of the Income Tax Act (“ITA”).

The panelists included Justice Karen Sharlow (Federal Court of Appeal), Justice Patrick Boyle (Tax Court of Canada), Phil Jolie (formerly of the Canada Revenue Agency), Ed Kroft (Blake, Cassels & Graydon LLP), Patricia Lee (Department of Justice) and Shawn D. Porter (Deloitte LLP and formerly at Department of Finance).

The general view of the panelists was that the potential application of GAAR in a specific case is very fact-dependent, and that the jurisprudence on the legal analysis continues to evolve. In the future, the focus will remain on how to interpret the “misuse and abuse” test within section 245.

Impact of GAAR

The panel discussed whether the GAAR has had an impact in deterring taxpayers from engaging in aggressive tax planning. Phil Jolie was of the view that it has not been a major deterrent as some abusive transactions are still not caught under GAAR, whereas Ed Kroft and Shawn D. Porter noted that the GAAR has had somewhat of a “chilling” effect in tax planning, particularly with public companies concerned about reputational risk.

Smell Test

There was a general consensus among the panelists that there is an element of a “smell test” in the GAAR. When evaluating whether GAAR should apply, Justice Boyle admitted there is an element of using one’s “nose” or getting in touch with one’s “spidey sense” and Justice Sharlow noted that she would determine if something “weird” was happening before undertaking the legal analysis as to whether the GAAR may apply.

These comments, made in jest by the panelists, convey the difficulties of analyzing complex transactions to determine whether a situation fits within the object and spirit of the Act under GAAR.

The other panelists noted that this may raise difficulties for tax practitioners who are asked to provide GAAR opinions to clients. The panelists advised that prudent counsel should address the evolving nature of GAAR jurisprudence in any opinion to a client on an issue where the GAAR could be engaged.

Current Litigation

Patricia Lee noted that the Department of Justice is currently litigating 44 cases where GAAR is a “live” issue. The cases include the following types of transactions:

  • Value shifting and capital loss creations;
  • Reverse attributes with trusts;
  • Base averaging of shares sold to a spouse;
  • Surplus stripping and, in particular, cross-border surplus stripping;
  • Manipulation of adjusted cost base of property;
  • Acquisition of tax credits and change in control; and
  • Leveraged donation cases.

The panelists concluded that, even after 25 years, there remains a degree of uncertainty in respect of the engagement and application of the GAAR.

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GAAR at 25: Panelists Discuss Lessons Learned and Challenges

The lighter side of tax opinions

We are often asked to provide a “likelihood of success” opinion (frequently with percentage thresholds) with respect to a proposed transaction. As anyone whose been asked for such an opinion knows, it is far from an exact science.

This document has been around for a while, but recently arrived on our desks again. It is a helpful (and humourous) listing of each percentage along with its corresponding ”plain english” explanation.

Enjoy!

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The lighter side of tax opinions