GAAR Clips Westminster's Wings

• Published date: 05 July 2023
• Law Firm: TaxChambers LLP
• Author: Mr Vern Krishna

It is a fundamental principle of Anglo-Canadian law that a taxpayer is entitled to arrange his or her affairs to minimize tax. The frequently decision is the judgment of the House of Lords in the Inland Revenue Commissioners v. His Grace the Duke of Westminster[1936] A.C. 1 (U.K. H.L.), which was the origin of the principle by the same name.

The Westminster principle is fundamental in Anglo-Canadian tax law and has been since the House of Lords decision. Over time, however, tax law balances the interest of the state in revenue collection and the private interests of taxpayers. As we have moved from the free market era of the mid-war years of the 20^th century towards a more regulatory state, tax law has enacted statutory changes that circumscribe tax planning, such as, the general anti-avoidance rule (GAAR) in section 245, which limits the principle where tax plans are "abusive" of the Income Tax Act [ITA].

Thus, the statement that "every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be" raises the inevitable question: what are the circumstances when the principle does not apply?

Background of Tax Avoidance

Canada imported the doctrine of strict literal construction from England into its common law system and applies it despite section 12 of the Interpretation Act, which deems every enactment to be remedial and "shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects".

Similarly, in Construction of Statutes (2nd ed. 1983), E.A. Dreidger, stated the modern rule:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament (at p. 87).

However, Canadian courts...