The Canadian GAAR: Presentation to IFA India Branch Western Region Conference Mumbai, July 6-7, 2012 David G. Duff Facul

1. The Canadian GAAR: Presentation to IFA India Branch Western Region Conference Mumbai, July 6-7, 2012 David G. Duff Faculty of Law University of British Columbia

2. Outline Origins Aims Structure Administration Judicial Scorecard Interpretation

3. Origins  announced in White Paper on Tax Reform, June 18, 1987  considerable consultation and revisions to initial draft  enacted applicable to transactions entered into after September 13, 1988  three years after Stubart Investments Ltd. v. Canada [SCC, 1984]  six months after Bronfman Trust v. Canada [SCC, 1987]  notwithstanding numerous specific anti-avoidance rules

4. Aims 1. “to prevent artificial tax avoidance arrangements” 2. “to reduce … the action and reaction endlessly produced by complex, specific tax measures aimed at sophisticated business practices, and the inevitable, professionally guided and equally specialized taxpayer reaction.” 3. “to strike a balance between taxpayers’ need for certainty in planning their affairs and the government’s responsibility to protect the tax base and the fairness of the tax system.”

5. Structure – application  applies to transactions that: (1) but for the GAAR, would result in a tax benefit (either alone or as part of a series of transactions) [245(3)]; (2) cannot reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit [245)3)]; and (3) can reasonably be considered to result in a misuse of specific provisions other than the GAAR or an abuse having regard to these provisions read as a whole [245(4)].

6. Structure - definitions  tax benefit defined as “a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty” [245(1)]  transaction defined to “include an arrangement or event” [245(1)]

7. Structure – consequences  where GAAR applies, tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny the tax benefit that, but for the GAAR, would result from the transaction or the series [245(2)]  tax consequences defined broadly as “the amount of income, taxable income, or taxable income earned in Canada, of tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for computing that amount” [245(1)]  in determining reasonable tax consequences, deductions, exemptions and exclusions may be disallowed in whole or part or allocated to any person, the nature of amounts may be recharacterized, and tax effects that would otherwise result may be ignored [245(5)]

8. Administration  all potential cases referred first to internal Canada Revenue Agency GAAR Committee  867 referrals up to 2012  applied in 614 (71%)  primary position in 287 (47%)  main categories of cases: surplus strips, income-splitting, loss creation and transfer, capital tax, debt forgiveness, interest deductibility, capital gains, indirect loans, charitable donations, debt parking, cross-border leasing, non-resident withholding tax, treaty exemption

9. Judicial Scorecard  Supreme Court of Canada: 4 decisions - 3 for Revenue Agency [Mathew, Lipson, Copthorne] - 1 for taxpayer [Canada Trustco]  Federal Court of Appeal: 15 final decisions - 8 for Revenue Agency - 7 for taxpayer  Tax Court of Canada: 21 final decisions - 7 for Revenue Agency - 14 for taxpayer

10. Interpretation – tax benefit  factual determination – Canada Trustco [SCC, 2005], para. 19  can be established by comparing taxpayer’s situation with alternative arrangement that might reasonably have been carried out but for the existence of the tax benefit – Copthorne [SCC, 2011], para. 35  burden of proof on taxpayer to refute Minister’s underlying assumptions of facts on which assessment based – Canada Trustco [SCC, 2005], para. 63

11. Interpretation – purpose of transaction  transactions that are part of a series may be primarily tax- motivated even if the series is undertaken or arranged primarily for bona fide non-tax reasons – MacKay [FCA, 2008], para. 25  purpose considered objectively and comparatively - Canada Trustco [SCC, 2005], paras. 28 and 29  factual determination with burden on taxpayer to disprove underlying assumptions on which Minister’s assessment based – Canada Trustco [SCC, 2005], para. 63

12. Interpretation – misuse or abuse  two stage analysis: (1) determine object, spirit or purpose of provisions or scheme; (2) determine whether transaction respects or frustrates this purpose – Copthorne [SCC, 2011], paras. 69 and 71  first stage requires courts to look “for the rationale that underlies the words” – Copthorne [SCC, 2011], para. 70  can be applied “only when the abusive nature of the transaction is clear” – Canada Trustco [SCC, 2005], para. 50  burden on Minister to establish abuse – Lipson [SCC, 2009], para. 21

13. Conclusions  a GAAR is a valuable addition to a tax system shaped by the literalism of strict construction and the formalism of the Duke of Westminster  in these circumstances, a GAAR represents a significant change in tax culture, requiring time for adjustment by judges, litigators, tax-planners, revenue authorities, and legislators  a GAAR necessarily creates some uncertainty for taxpayers, but this is lessened by safeguards in the legislation (e.g., purpose and abuse requirements) and experience over time, and must be balanced against its advantages