Clarity needed on anti-avoidance

The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada wrote to the Department of Finance to offer comments and recommendations on the General Anti-Avoidance Rule, or GAAR.

The 2023 federal budget proposed adding a preamble to Section 245 of the Income Tax Act, or ITA, revising the definition of avoidance transaction, adding a specific economic substance test and extending the period for GAAR reassessments.

The most significant issue is the effective date of the proposed changes. The Joint Committee says revisions to the GAAR should only apply on a prospective basis. “The changes that have been proposed are significant, and in particular, a penalty will now apply on GAAR assessments (subject to disclosure exceptions) if the proposed change is enacted,” the letter says.

The proposed economic substance rule is to ensure that economic substance factors are considered when determining if GAAR applies. However, the Joint Committee explains, how this works in practice is not well understood. “In particular, the weight that should be placed on economic substance factors is unclear and the views of members of the tax community seem to vary significantly,” the submission says.

Since the proposed changes include a penalty, it is important that the government’s intentions on the economic substance test be as clear as possible. The Joint Committee recommends that more specific and substantive examples be provided on how the government believes that economic substance considerations should be integrated into the determination of whether the GAAR applies.

The letter discusses the application of financial penalties included in the proposals. It expresses the belief that “there should be some recourse for taxpayers who are assessed under the GAAR in a scenario where there have been developments on the application of the GAAR after the time that the ability to report a transaction or series under proposed subsection 237.3(12.1) has passed.” For instance, by giving taxpayers the ability to file a late disclosure or allowing a waiver of the penalty under certain conditions.

As well, there should be clear guidance on how proposed penalties will be calculated in situations where calculating the exact amount of the tax benefit is uncertain.