Canada: Federal Court Of Appeal And GAAR – Good News/Bad News

This article was originally published in Blakes Bulletin on Tax and Corporate Finance, April 2004

The Federal Court of Appeal (FCA) recently dismissed the Crown’s appeals in Canada Trustcoand Imperial Oil with respect to the application of the general anti-avoidance rule (GAAR) in the Canadian Income Tax Act.

In each case, the Crown appealed the application of the saving provision that prevents GAAR from being applied to avoidance transactions where the transactions do not constitute either a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole. The recent decisions of the FCA suggest that even transactions primarily motivated by tax considerations will not be subject to GAAR if they comply with the Act unless a very clear "misuse or abuse" has occurred.Transactions resulting in corporate loss trading are subject to GAAR, but neither transferring unrestricted depreciation deductions, nor taking advantage of tax loopholes, appear to be.


GAAR applies to a series of transactions that is an "avoidance transaction" (i.e., it resulted in a tax benefit and was primarily tax motivated), unless the series does not result in a misuse or abuse. In OSFC Holdings, the FCA designed the two part framework for assessing whether a "misuse" or "abuse" has occurred. The two part framework requires a court to identify the "relevant policy" – the object and spirit or scheme of the allegedly misused provision or of the Act read as a whole.Then, the facts are assessed to determine whether the series constitutes a misuse or abuse having regard to that identified policy.

Arguably, the most controversial part of the framework espoused in OSFC Holdingsis that, in ascertaining the relevant policy that forms the basis for the analysis, reference to extrinsic aids such as technical notes, the writings of legal authors and commentators, enacting notes, Hansard, budget speeches, commission reports, etc., is specifically permitted. Concern developed over the use of such non-legislative aids to guide the application of GAAR, a reaction contemplated by the FCA in OSFC Holdingsand addressed by its emphatic holding that any such identified "policy" had to be "clear and unambiguous". Anything less would represent a "complete abdication by Parliament of its role as lawmaker in favour of the subjective judgment of the Court".

OSFC Holdings

In OSFC Holdings, interests in a partnership that held a portfolio of non-performing mortgage assets were transferred to arm’s length purchasers. Because the partnership was formed by one corporate partner contributing the mortgage portfolio to the partnership to gain its partnership interest, the loss on the transfer of the devalued portfolio was "denied" to the transferor/ corporate partner, and the amount of that denied loss was added to the partnership’s tax cost for the portfolio, all due to the operation of the stop-loss provision then in force (subsection 18(13) of the Act). Subsequent arm’s length owners of the partnership interests were able to reap the tax benefits (losses) that flowed once the partnership sold or wrote-down the value of the underlying mortgage portfolio.

The FCA could identify no policy that had been misused in the application of the operative stop-loss rule; on the contrary, it operated precisely as it was intended to operate, by denying an artificial loss to the original partner that transferred the devalued portfolio to the partnership and preserving the loss by adding it to the partnership’s tax cost.The FCA did, however, identify a clear and unequivocal policy in the Act that prohibits corporate loss trading amongst arm’s length parties by considering, among other things, the change of control rules in the Act. Since the portfolio’s value dropped during the period that it was owned by a corporation, the FCA concluded that the transactions "abused" the Act by effectively transferring the losses arising in a corporation to arm’s length parties in contravention of that policy.

Canada Trustco

In Canada Trustco, the FCA was concerned with the transfer of capital cost allowance (CCA) between parties to transactions designed to legally effect the sale of trailers, their subsequent lease and ultimate sub-lease back to the original owner.The transactions were designed to create minimal financial risk to any party – loans were secured with rental assignments from bank accounts containing prepaid rent financed by sale proceeds, etc. The result of the transactions was that the "purchaser" in the transactions, Canada Trustco Mortgage Co. (CT), became entitled to the CCA deductions relating to the trailers. Since trailers are exempt property for the purpose of the specified leasing property rules, CT was not restricted in deducting the CCA against any source of income.

The FCA dismissed the Crown’s appeal of the Tax Court of Canada decision on "misuse or abuse" without hearing from CT’s counsel.The tax results in the transactions stemmed from very deliberate provisions of the Act – specific exemptions to the specified leasing property rules and the financial sale/leaseback provisions.The FCA was not prepared to entertain an appeal on the basis of a vague policy that the taxpayer deducting CCA must have some threshold "true economic risk or ownership".

Imperial Oil

In Imperial Oil, the FCA again refused to lower the bar on "clear and unambiguous policy". Imperial made short-term loans totalling $500 million to subsidiaries of Canadian chartered banks that were outstanding over its taxation year end. Since those bank subsidiaries were not themselves "financial institutions", Imperial could, and did, claim an investment allowance for those loans, saving approximately $750,000 in large corporations tax (LCT). Since those loans were repaid before the respective subsidiaries’ taxation year ends, no LCT was payable by any of them in respect of the loans.

The FCA rejected each of the Crown’s numerous proposals of "policy".The most notable, perhaps, was the Crown submission that the LCT provisions present a clear and unambiguous policy that large corporations should pay a minimum amount of tax in order to reduce federal deficits.The FCA acknowledged that this may, in fact, have been Parliament’s general intention in introducing LCT in 1989 – to ensure that large corporations paid their "fair share" of federal tax irrespective of the availability of usual income tax shelter, but it ultimately concluded that those general statutory objectives were of only peripheral relevance, providing no more than broad context for the relevant provisions.

The Crown argued that this "policy" was violated when a loan was made by Imperial to any corporation with a fiscal year end different from its own.The FCA rejected this argument, because accepting it would make GAAR applicable to every transaction entered into for the purpose of reducing a taxpayer’s LCT – a result clearly inconsistent with the "misuse or abuse" analysis. The FCA reasoned that accepting the Crown’s view of the relevant "policy" would require it to apply GAAR to loans from LCT payors to unrelated corporations with less than $10 million of assets if the loan’s primary purpose and result were to reduce LCT. Neither the policy objectives nor the function of the investment allowance (which it agreed was to prevent double taxation) mandate that result.

The FCA recognized that Imperial took advantage of a loophole in the statutory scheme, namely the failure to deal with the consequences of different corporate year ends. It concluded, however, that Parliament virtually invited such LCT reduction transactions and Imperial’s acceptance of that virtual invitation was no misuse or abuse.

Good News/Bad News

The good news is that the only clear and unequivocal policy that has been identified by the FCA to have been violated is the restriction of corporate loss trading amongst unrelated corporations. This suggests not only that "policy" used to establish "misuse or abuse" be found within the Act (and not, for example, in the broad Parliamentary objective of raising tax revenue), but also that the provisions of the Act ought to suggest that policy very clearly.The FCA continues to adhere to the very high standard for "clear and unequivocal policy" set by it in OSFC Holdings.

The bad news is that notwithstanding that the FCA was requested by the taxpayer in each of the decisions to reconsider the respective Tax Court of Canada conclusions that the impugned transactions constituted "avoidance transactions" for the purposes of GAAR, neither panel reviewed nor decided the matter. Although each lower court decision acknowledged a bona fide business purpose and/or ordinary business characteristics, the transactions in each were found to be avoidance transactions. In the decision of the Tax Court of Canada in Canada Trustco, Miller T.C.J. suggested that the term "avoidance transaction" has a "bad rap", writing that "avoidance transactions" is not "a dirty word". Both cases suggest that an alarmingly low threshold of tax motivation is necessary to conclude that a transaction is an "avoidance transaction".

This judicial trend necessarily expands the GAAR net in Canada. Pessimists can conclude easily that this low threshold of tax motivation required to find an "avoidance transaction" proves the theory that "misuse or abuse" is GAAR.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions