GAAR and self-help transactions
CBA-CPA Joint Committee on Taxation comment on proposed amendments to s. 245 of the Income Tax Act.
Following an earlier submission on proposed amendments to section 245 of the Income Tax Act, the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada sent further comments about the General Anti-Avoidance Rule, or GAAR, and self-help transactions.
Specifically, the Joint Committee discusses certain transactions or series of transactions commonly implemented to avoid certain tax implications that could be considered, in some cases, to lack economic substance but that should not be assumed to misuse or abuse the GAAR.
The preamble in subsection 245(0.1) of the ITA introduces a presumption of misuse or abuse that “will blur the line between acceptable transactions versus abusive transactions.”
The proposed preamble does this by stating the GAAR should not prevent taxpayers from obtaining tax benefits “contemplated by Parliament.” The Joint Committee points out that, “many tax planning transactions result in, or from, the application of various provisions and regimes in order to accomplish a particular outcome that is not specifically documented in the ITA, nor originally contemplated by Parliament, but are nevertheless considered appropriate by both Finance and the Canada Revenue Agency (CRA).”
As the letter states, it should be made clear in the explanatory notes that “certain transactions which may include one or more of the factors listed in subsection 245(4.2) will not be considered to result in a misuse or abuse where they are undertaken to achieve a result which would not be considered to defeat or frustrate the provisions of the ITA.”
In addition, the Joint Committee notes that it would be helpful if the explanatory notes included examples of acceptable transactions and listed suggested transactions that should be identified as acceptable tax planning strategies.
Such a list “will help formulate a better understanding of the application of the proposed GAAR amendments, particularly the application of the new economic substance test,” the letter concludes.