22 | Tax Disputes
ance Rule (GAAR) — s. 245 of the Income Tax Act. It is a catch-all clause that
CRA is invoking with increasing frequency to assess taxpayers.
GAAR stipulates that, where a transaction or a series of transactions have as
the primary purpose the avoidance of tax,
then the tax benefit may be denied — if
the transaction constitutes a "misuse" or
"abuse" of the tax provisions it utilized.
The GAAR Committee is the notorious inter-departmental body within the
federal bureaucracy that makes recommendations on contentious GAAR cases.
It had 1,080 cases referred to it between
1988 and 2012, and decided in 76 per
cent (822) of those cases that GAAR did
indeed apply.
The percentage of cases that the GAAR
Committee "approves for assessment – as
opposed to turning down – has gone way
up," says Robert Couzin, a founding partner of Couzin Taylor LLP, a tax boutique
affiliated with Ernst & Young LLP in Toronto. "Over the years, CRA field offices
have become much better at preparing
their GAAR files when they send them
to Ottawa."
Of the files reviewed by the committee,
21 per cent involved surplus stripping –
pulling retained earnings and profits out
of a corporation in a form other than
dividends – and 8 per cent involved loss
creation by stock dividend.
Enacted in 1988, GAAR has been used
by CRA much more in the second half of
its history. "What they consider 'abusive'
has changed," says Al Meghji, tax litigator
and partner with Osler, Hoskin & Harcourt LLP in Calgary and Toronto.
"The transactions they first started
going after were clearly over the line,"
says Meghji. "Now they're going after
transactions where thinking people may
actually disagree. GAAR litigation is
getting more nuanced."
There were 19 GAAR cases that went
to court prior to 2005 and 26 since then.
In the first period, the Crown won only
seven, while in the latter period it won 14.
"The tax authorities have been emboldened by their success [at the Supreme
Court of Canada]," says Du Pont. A series
of judgments since 2005 by the top court
turning on GAAR has prompted CRA
to challenge tax planning arrangements
more vigorously.
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