GAAR Clips Westminster's Wings

Published date05 July 2023
Subject MatterReal Estate and Construction, Tax, Construction & Planning, Income Tax
Law FirmTaxChambers LLP
AuthorMr 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 20th 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 interpret tax law strictly and literally on the traditional constitutional theory of parliamentary supremacy in tax legislation. Canada has resisted non-formalist methods of interpretation partly, as the House of Lords remarked, due to the dominance of the accounting profession in Canadian tax law.1

The resilience to change is only partly attributable to the influence of the Westminster doctrine that a taxpayer is entitled to arrange his affairs under a tax statute so as to minimize tax, regardless of the purpose of the statute. The dominance of the accounting...

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