Budget 2023 Proposed GAAR Amendments: Rewriting The Rules ' The Ultimate Game-Changer

• Published date: 29 June 2023
• Law Firm: Gowling WLG
• Author: Mr John Sorensen

The March 28, 2023 Federal Budget proposed numerous measures previously discussed in our Firm commentary, prepared on Budget night. This article expands on our initial analysis of the proposed amendments to the GAAR.

Taxpayers are free to arrange their affairs to reduce their tax liability, obviously: it would be absurd if the government deemed every taxpayer's financial position as final at some point, like stopping the music in a game of fiscal musical chairs. The UK Royal Commission on the Taxation of Profits and Income said it best in 1954: "There is no reason to assume that the situation of any one taxpayer at that moment is the fairest possible as between himself and others differently situated [and] it seems wrong to propound any principle that would have the effect of fixing each taxpayer in his situation, without allowing him any chance of so altering his arrangement as to reduce his liability ..." That said, tax plagnning subsists within a web of charging and relieving provisions, judicial anti-avoidance doctrines, and specific anti-avoidance rules (SAARs) that foreclose certain strategies. However, SAARs do not completely delineate the boundaries of legitimate planning and abusive avoidance.

A seminal 1988 paper credited to David Dodge (then Senior Assistant Deputy Minister of Finance) stated the case for a general anti-avoidance rule (GAAR): "... the main limits of the "specific rules" approach ... are the practical impossibility of foreseeing every avoidance scheme, the fact that every new rule opens new loopholes, the inequity of adopting rules that may catch transactions that were not intended to be covered, the fact that specific rules outline particular schemes and may therefore help to develop other avoidance strategies and, finally, added complexity. Proposed section 245 is precisely intended to minimize the need to respond repeatedly to abusive strategies by enacting specific legislation every time a purely tax-motivated scheme is marketed."¹

Since the GAAR was enacted in 1988, it has been considered as an assessment basis in more than 1,600 cases and most of the time the CRA applied it as a primary or secondary assessing position.² Numerous GAAR cases wind their way through the Tax Court of Canada and the Federal Court of Appeal annually. Recently, the Supreme Court of Canada gave judgment in its sixth GAAR appeal, in Deans Knight Income Corp. v. Canada.³ Five of those six Supreme Court cases involved domestic strategies and the Crown won in four of them - a good track record.

Despite the Crown's regular and successful use of the GAAR, the Trudeau government wanted change.⁴ The drivers seem to be political, rather than good tax policy.

Preamble

According to the federal Interpretation Act,⁵ "[t]he preamble of an enactment shall be read as a part of the enactment intended to assist in explaining its purport and object."⁶ Like most things in life and law, a preamble's weight depends on the circumstances and preambles can be important to purposive interpretation. This view assumes that judges need assistance or encouragement to undertake purposive analysis. Budget 2023 stated that the preamble would be added "in order to help address interpretive issues and ensure that the GAAR applies as intended." Given the reasons of a majority of the Supreme Court in Deans Knight, one might reasonably conclude that the courts do not need a Parliamentary reminder.

The proposed preamble states at paragraph (a) that the GAAR applies to deny a tax benefit arising from avoidance transactions that misuse provisions of the Income Tax Act (ITA), the Income Tax Regulations, the Income Tax Application Rules, a tax treaty, or any other enactment that is relevant in computing tax or any other payable or refundable amount, or those provisions read as a whole. This language is followed with the qualifier that taxpayers are allowed to obtain benefits contemplated by relevant provisions. The goal of this paragraph (a) is somewhat unclear: is Finance seeking to reanimate a distinction between misuse and abuse?⁷ Further, and as we noted in our Budget commentary, there is a gap: between abusive tax planning and "tax benefits contemplated by the relevant provisions" exists planning that was neither contemplated nor abusive.

Paragraph (b) states that the GAAR: strikes a balance between taxpayers' need for certainty and the government's responsibility to protect the tax base and the fairness of the tax system. There is nothing novel here. The mantra that taxpayers are entitled to "certainty, predictability and fairness" just means that taxpayers should be free from arbitrary determinations by revenue authorities and courts. For a democracy that respects the rule of law and values investment and economic development, "certainty, predictability and fairness" in the application of law is essential. The separation of the concepts of certainty and fairness that appears in the Alta Energy⁸ dissent at paragraph 121 (relying on the majority reasons in Lipson⁹) is a distinction that is obvious, but does not affect the actual "certainty, predictability and fairness" principle. At its highest and best, the question of who is entitled to fairness has an easy answer: everyone. But fairness to everyone is not justiciable - at least not in tax, and no GAAR cases have ever (or will ever) be determined based on a standalone fairness argument. The fairness concept in tax disputes is intimately linked to certainty and predictability and, respectfully, the proposed amendment has to be for public consumption rather than for the edification of the courts.

Finally, paragraph (c) asserts that the GAAR can apply regardless of whether a tax strategy is foreseen. This is likely responsive to the statement in the majority reasons in Alta Energy at paragraph 80: "The GAAR was enacted to catch unforeseen tax strategies. However, the use of conduit corporations ... was not an unforeseen tax strategy at the time of the Treaty." However, this statement is balanced by the later confirmation that an absence of a SAAR to prevent an outcome is not determinative of...