The Tax Court Of Canada Orders The Canada Revenue Agency To Release GAAR Committee Reports About Similarly Situated Taxpayers: Coopers Park Real Estate Development V The Queen, 2022 TCC 82

• Published date: 23 November 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction: The General Anti-Avoidance Rule & Documentary Discovery during Tax Litigation

Section 245 of Canada's Income Tax Act contains the general anti-avoidance rule (also known as the "GAAR"). The GAAR aims to prevent taxpayers from enjoying tax benefits by invoking avoidance transactions that misuse or abuse specific provisions of the Income Tax Act. In particular, the rule gives the Canada Revenue Agency the power to deny a tax benefit-i.e., tax reduction, tax avoidance, or tax deferral-arising from an abusive avoidance transaction or from a series of transactions that included an abusive avoidance transaction.

In a tax dispute involving the GAAR, the CRA bears the burden of proving that a transaction resulted in abusive tax avoidance. To do so, the Canada Revenue Agency must establish that the resulting tax benefit would contravene the purpose of the income-tax provision that the taxpayer relied upon when invoking the avoidance transaction. Hence, the GAAR effectively permits the CRA to look past the text of the Income Tax Act and ask whether the transaction offended a tax rule's purpose.

The GAAR therefore has the potential to undermine certainty for taxpayers attempting to plan their affairs. The rule asks not whether a transaction satisfied the concrete language describing the impugned tax rule, but whether the transaction violated the tax rule's unwritten purpose. As a result, Canadian courts, the Minister of National Revenue, and the Canada Revenue Agency all understand the importance of applying the GAAR consistently. To this end, the CRA has established a GAAR Committee, which consists of officials from the Canada Revenue Agency, the Department of Finance, and the Department of Justice. The GAAR Committee reviews all files where the GAAR might apply-including taxpayer requests for advance rulings and referrals from the CRA's Audit Division-and decides whether to issue a GAAR-based ruling or reassessment.

The Canada Revenue Agency had previously concealed the details of the GAAR Committee's proceedings. These details would, of course, benefit taxpayers facing GAAR-based reassessments. In Coopers Park v The Queen, 2022 TCC 82, the Tax Court of Canada ordered that, during the discovery process in tax litigation involving a GAAR-based assessment, the CRA must release GAAR Committee details not only about the appellant taxpayer but also about similarly situated taxpayers. This decision means that a taxpayer's Canadian tax-litigation lawyer may now obtain GAAR Committee details that had previously been inaccessible. (Of course, there are certain limits. For example, the decision doesn't compel the CRA to release privileged documents.)

After discussing both the general anti-avoidance rule and the discovery process in tax litigation, this article examines the Tax Court's decision in Coopers Park. We conclude the article by offering pro tax tips from our expert Canadian tax-litigation lawyers.

The General Anti-Avoidance Rule (the GAAR): Section 245 of Canada's Income Tax Act

Section 245 of Canada's Income Tax Act contain the provisions relating to the general anti-avoidance rule (also known as the "GAAR"). These provisions allow the Canada Revenue Agency to deny a tax benefit-i.e., tax reduction, tax avoidance, or tax deferral-arising from an abusive avoidance transaction or from a series of transactions that included an abusive avoidance transaction.

The Income Tax Act contains many specific anti-avoidance rules. These rules preclude taxpayers from taking advantage of specific loopholes that would otherwise be available. The GAAR, however, stems from the concern that it's impossible to plug every legislative loophole, so the tax system requires a general rule to fill in the gaps. Thus, unlike the specific anti-avoidance rules, which are drafted using highly technical language dictating specific consequences, the GAAR is a broadly drafted provision.

Subsection 245(2) sets out the basic rule: "Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction."

According to Supreme Court of Canada decisions, the GAAR applies only if three conditions have been satisfied:

• The taxpayer enjoyed a "tax benefit" resulting from a transaction or part of a series of transactions. (A "tax benefit" encompasses any reduction, avoidance, or deferral of tax.)
• The transaction was an "avoidance transaction," which refers to a transaction that isn't undertaken or arranged primarily for a bona fidepurpose other than to obtain a tax benefit.
• The tax avoidance must have been "abusive," which means that the resulting tax benefit would contravene the "object, spirit, or purpose" of the tax provisions relied upon by the taxpayer.

If the GAAR applies, then the Canada Revenue Agency may essentially take any "reasonable" step to deny the resulting tax benefit. Subsection 245(5) provides the following non-comprehensive list of remedies that the CRA may invoke:

• Allow or deny, in whole or in part, any deduction, exemption or exclusion for the purposes of computing the taxpayer's income, taxable income, taxable income earned in Canada, or tax payable;
• Allocate to "any person" (which means that the person need not be the taxpayer who entered the avoidance transaction or who enjoyed the resulting tax benefit) any deduction, exemption exclusion, income, loss, or other amount or part thereof;
• Recharacterize the nature of any payment or other amount (for example: recharacterizing a half-taxable capital gain as fully taxable business income); and
• Ignore the tax effects that would...