Tax Tip[] GAAR

GAAR – Reasons For Transaction

“Having a business transaction may preclude GAAR when tax is not the main motivation.”

In the recent case of MacKay v. The Queen (2007 TCC 94), the Tax Court made a detailed review of the intention of the taxpayers in determining whether the General Anti-Avoidance Rule (“GAAR”) applied. In this case, a bank hadacquired a shopping mall by way of mortgage foreclosure. The mortgage outstanding was approximately $16 million. The taxpayers had agreed to acquire the property from the bank for $10 million. It was clear that, throughout the discussions, the focus of the purchase structuring was to acquire the property. It was not just a way to claim a tax write-off. The purchase was structured in a way that permitted the taxpayers to claim a non-capital loss of approximately $6 million, the difference between the outstanding mortgage and the purchase price. The purchaser structured the transaction through a partnership that allowed the loss to be allocated to the partners. If no steps had been taken to acquire the property via a partnership, the loss would not have been available.

The taxpayers were involved in real estate development. It was clear that they intended to purchase the shopping mall, build it up and sell it at a profit. The CRA did not challenge the taxpayers’ claim that the property was inventory that could be written down under subsection 10(1) of the Income Tax Act.

The Court made it clear that while reviewing each transaction, an overall review of the purpose of the series of transactions is required. Even though the overall purpose is not determinative, it is one of the pertinent facts to be considered in determiningwhether there was an avoidance transaction. In its analysis, the Tax Court noted that “…its primary purpose may still be a non-tax purpose when assessed with reference to the overall series where the facts support that the dominant aim is to achieve a commerciallyreasonable deal in a tax-effective manner.”

The Tax Court concluded that “… obtaining tax losses was not the primary purpose of any of the transactions” and that “The Appellants commercial purpose of acquiring the Shopping Centre to carry out its Business Plan was the primary purpose of each transaction.”The conclusion was that the GAAR did not apply.

This case is particularly interesting because, on the evidence, the transaction was not structured to obtain tax benefits. Once the deal was agreed, tax benefits were considered and advantage was taken of them. If this transaction had been “marketed” as a tax loss utilization plan, the result may have been different. This was a commercial transaction, later structured to obtain tax benefits.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

When CRA Does Not Like the Results, GAAR Is Applied

“The CRA will use GAAR to overcome a decision they do not like.”

The recent case of McMullen (2007 TCC 16) shows how the CRA will use GAAR as a last ditch effort to overcome a decision that they do not like. In this case, aplan was implemented to divide a business. The two arm’s length shareholders wanted to go in different directions and steps were taken to allow each shareholder to operate in a different location and to carry on future business in that location. The entire transactionwas made tax-free by using the capital gains exemption and the inter-corporate tax-free dividend provisions in section 112 of the Income Tax Act. The CRA attempted to apply subsections 84(2), 84.1(1) or section 245 (GAAR) to make the transactions taxable.

The CRA argued either that one of the parties received assets on the wind-up or that the transaction was not at arm’s length. If neither of these arguments applied, they claimed that the GAAR provisions should apply. The CRA continues to claim that unrelated persons are not at arm’s length when they complete a transaction that is beneficial to both. The Court, in this case, referred to a 1997 case (McNichol) in which the Tax Court Judge said:

“…buyer and seller do not act in concert simply because the agreement which they seek to achieve can be expected to benefit both.”

The CRA has difficulty with this concept. In this case, the two shareholders tried to find the most tax efficient way to achieve a legitimate business result, i.e. dividing the business.

The Tax Court decided that the parties were at arm’s length. The Court also decidedthat the provisions of GAAR did not apply, as there was no abuse of any section of the Income Tax Act. The Court made it clear that all of the provisions of the Income Tax Act were properly complied with and that they were used as they were meant to be used.

The Court several times referred to the fact that the intent of these transactions was to separate the assets of the business and not to avoid taxes or to obtain a taxbenefit. The fact that these transactions had a business purpose seems to have been an important factor in the decision of the Court.

As always, when there is a legitimate business transaction and the provisions of the Income Tax Act are properly complied with, it is difficult for the CRA to be successful in their claim to apply GAAR.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

GAAR & International Tax Treaties

“CRA loses landmark case on application of GAAR to an International Tax Treaty.”

The case of MIL Investments S.A. v. the Queen, 2006 TCC460 answers the perplexing question as to whether the General Anti-Avoidance Rule (GAAR) can apply to the plain wording and interpretation of an international tax treaty. In this case, MIL Investments S.A., originally a Cayman Island company, migrated to Luxembourg prior to selling shares of a Canadian corporation. Absent the shuffle to Luxembourg, the capital gain would have been taxable in Canada. However, the provisions of the Canada/Luxembourg International tax treaty overrode, to provide for an exemption from Canadian tax.

CRA attempted to argue that the claim of an exemption under the treaty was an abuse, which should be struck down under GAAR, particularly as this rule is now extended to cover international tax treaties.

The Court did not agree. In his decision, Mr. Justice Bell stated:

“the appellants reliance upon a treaty provision as agreed upon by both Canada and Luxembourg cannot be viewed as being a misuse or abuse. Canada, if concerned with the preferable tax rates of any of its treaty partners, instead of applying section 245, should seek recourse by attempting to renegotiate the selected tax treaties.”

CRA, however, advanced a second argument. It stated that even if GAAR does not apply to deny the treaty benefit in this case, there may be an implied rule in interpreting treaties which can deny a treaty benefit based on an anti-abuse rule inherent within the treaty itself. Mr. Justice Bell found that there was no inherent anti-abuse rule in the treaty. He stated:

“in particular, in light of the OECD commentary and the decision by Canada and Luxembourg not to include an explicit reference to anti-avoidance rules in their carefully negotiated treaty, I find there is no ambiguity in the treaty permitting it to be construed as containing an inherent anti-abuse rule. Simply put, the ‘ordinary meaning’ of the treaty allowing the appellant to claim the exemption must be respected.”

The judgement in this case is sound and well reasoned. It is very definitive in its analysis. While there is always the possibility of this being appealed, this represents the law as far as international treaties and abuse are concerned.

It is reassuring to know that one can rely on the plain wording of an international treaty, and that there is no other set of rules (possibly unwritten rules) that one needs to consider in the interpretation. The judgement is refreshing in its clarity and the precision of its arguments.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

GAAR – Using Attribution to the Taxpayer’s Benefit

“Using attribution to your benefit is not GAAR.”

In the recent case of Overs (2006 TCC 26), the taxpayer’s deductions for carrying charges and interest expense were denied by CRA pursuant to the GAAR rules in section 245 of the Income Tax Act.

The taxpayer’s loan from his company had to be repaid to avoid the income inclusion rules of subsection 15(2). In order to repay the loan, the following transactions occurred:

  1. The taxpayer’s wife borrowed $2.3 million from the Bank of Montreal.
  2. The taxpayer’s company provided a guarantee to the bank for the loan and a pledge of cash collateral in the amount of $2.3 million.
  3. The taxpayer’s wife purchased shares of the taxpayer’s company from the taxpayer for an amount approximately equal to the loan outstanding.
  4. The taxpayer used the proceeds from the sale of the shares to repay the shareholder loan.

When the taxpayer filed his tax return, he did not elect out of provisions of subsection 73(1),so that the transaction between the taxpayer and his wife took place at cost, and not at fair market value. The taxpayer took the position that he could deduct the interest expense paid by his wife, pursuant to subsection 74.1(1). This subsection provides that any transfers to a spouse that are not at fair market value will result in the attribution of any income or loss from the property that was transferred. The net result was that the taxpayer did not have an income inclusion in respect of the shareholder loan and he could deduct the interest that his wife paid on the funds ultimately used to repay the shareholder loan.

The CRA did not challenge the fact that all of the provisions noted above had been properly applied. They did, however, attempt to apply the GAAR rules. The Tax Court followed the guidance given in the Canada Trustco case by the Supreme Court of Canada, wherein the Court first looked at whether there was a tax benefit, then whether there was an avoidance transaction and finally whether the avoidance transaction was abusive. The Court concluded that there clearly was a tax benefit, since the taxpayer deducted an amount that reduced his taxes. The Court concluded that there were no avoidance transactions, since each of the sections involved were properly applied, so there could not be avoidance transactions when the rules in subsections 15(2), 73(1) and 74.1(1) were properly followed. The Court then considered whether there was abusive tax avoidance. The Court concluded that there was no abusive tax avoidance, even if a higher Court were to determine that there was an avoidance transaction.

This decision offers the possibility of interesting tax planning, when a client has to repay a shareholder loan. The client’s spouhse can borrow, and use the funds to purchase shares of the client’s company. The client can then use the proceeds of the share sale to repay the shareholder loan.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

First GAAR Case After Supreme Court Decision

“The Evans case clarifies the practical application of GAAR.”

A recent case (Evans) decided by Chief Justice Bowman of the Tax Court of Canada is the first case dealing with GAAR after the Supreme Court decisions on the same subject. In the Evans case, Dr. Evans owned a professional corporation in Alberta. The corporation issued a stock dividend of preferred shares to Dr. Evans. The next day, the preferred shares were sold to a limited partnership consisting of Dr. Evans’ wife as general partner and three of his children as limited partners. The price was the fair market value of $487,000 and a promissory note in that amount was given to Dr. Evans by the partnership. The note was interest-bearing at 5% per annum. Dr. Evans realized a capital gain of $486,900 and he claimed the capital gains exemption so that he paid no tax in respect of the disposition. Over the next three years, the professional corporation paid amounts to the partnership by way of dividends and redemptions of the preferred shares. The dividends were included in the partnership’s income and allocated to the various partners. Since the partners had little or no other income, the tax that they paid on the allocated dividend income was very low.

The CRA tried to apply GAAR to this situation. Judge Bowman went through a detailed analysis of what the Supreme Court’s decision meant on a practical basis. He had some interesting comments as listed below:

  • The GAAR draws a line between legitimate tax minimization and abusive tax avoidance.
  • GAAR does not permit a transaction to be considered to be an avoidance transaction because some alternative transactions that might have achieved an equivalent result would have resulted in higher taxes.
  • Parliament did not intend the GAAR rules to operate simply as a business purpose test.

He stated that there cannot be “an abuse of the provisions of the Act where each section operates exactly the way it was supposed to.”

The Tax Court Judge decided that GAAR did not apply in this situation and that the tax results should remain as they were originally filed.

It is strongly recommended that all people who deal with tax matters read this case as it is excellent guidance as to how the GAAR rules will be applied in the future.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.