Retroactivity and the General Anti-Avoidance Rule

1. Retroactivity and the General Anti-Avoidance Rule Benjamin Alarie Faculty of Law, University of Toronto

2. Previous Version of s. 245(4): For greater certainty, subsection 245(2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.

3. New Version of s. 245(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction (a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of (i) this Act, (ii) the Income Tax Regulations, (iii) the Income Tax Application Rules, (iv) a tax treaty, or (v) any other enactment that is relevant […]; or (b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.

4. Three Points to Discuss • General legal obstacles to retroactivity • Consequences for pending proceedings • Policy observations regarding retroactive changes to the GAAR more generally

5. 1. General Legal Obstacles to Retroactivity • Presumption against retroactive legislation • Contrary to the rule of law, ancient origins • Strict interpretation of retroactive enactments • Kent v. The King (SCC, 1924) • Clear constitutional limits to retroactivity when liberty is at stake • Charter: 11(g) and s. 7

6. 1. General Legal Obstacles to Retroactivity Most recent word from SCC on retroactivity: Except for criminal law, the retrospectivity and retroactivity of which is limited by s. 11(g) of the Charter, there is no requirement of legislative prospectivity embodied in the rule of law or in any provision of our Constitution. (British Columbia v. Imperial Oil, SCC, Sept. 2005)

7. 2. Consequences for Pending Proceedings Canada Trustco: “Although this amendment was enacted to apply retroactively, it cannot apply at this stage of appellate review, after the parties argued their cases and the Tax Court judge rendered his decision on the basis of the GAAR as it read prior to the amendment.” (para. 7)

8. 2. Consequences for Pending Proceedings Is this an accurate statement of the law? - Hornby (BCCA, 1988): must be explicit to interfere with pending proceedings - Community Economic Development Fund v. Canadian `Pickles Corp. (SCC, 1991): “as the parties agree that the recently made amendments do not affect the outcome of this appeal, they need not under the circumstances be considered further” - CI Mutual Funds (FCA, 1999): “ample authorities” that legislation “need not specifically refer to pending actions”

9. 3. Policy Observations: Retroactivity and the GAAR Should there be compensation or grandfathering when tax laws change? Two primary views: • Yes, as a general rule (the “old” view) • No, as a general rule (the “conventional” view) Always winners and losers with tax reform; better to encourage individuals to anticipate and adjust (Graetz, 1977; Kaplow, 1986)

10. 3. Policy Observations: Retroactivity and the GAAR More realistic: desirability depends on the specific nature of the rule change (Shaviro, 2000) So what about retroactivity and the GAAR? • Retroactive changes to improve the GAAR (e.g. 245(4) amendment) should be expected as Parliament learns from experience • Shutting down abusive tax avoidance is efficient economically, and if taken seriously is a goal that Parliament should want taxpayers to anticipate

11. 3. Policy Observations: Retroactivity and the GAAR What changes should be anticipated? • Assume Parliament will target the greatest weaknesses of the GAAR • Achilles’ Heel of the GAAR: no downside risk; therefore prima facie rational to “take a run at it” • Parliament’s Solution: introduce heightened downside risk through some mechanism that will tend to tip the cost-benefit calculus against “taking a run at it”

12. Summary • Legally no impediment to retroactive tax legislation • Can affect pending proceedings if clear • Policy Observations: • Changes to the GAAR should be retroactive because Parliament should want taxpayers to anticipate improvements to the GAAR • Parliament’s Solution: introduce heightened downside risk

13. Conclusion Policy makers: • don’t be bashful about using retroactive powers • think seriously about heightening tax liability if GAAR applies Tax planners: • assess political probability of heightened liability prospectively versus retroactively, given Parliament’s incentives • be forthright in advising clients about possibility of heightened retroactive liability • clear potentially “abusive” transactions in advance to resolve uncertainty