Canada: Canadian Tax @ Gowlings

Last Updated: November 1 2005

Edited by Mr Vince F. Imerti

Landmark Decisions in Canadian Tax Law

In 1988 the Canadian Minister of Finance announced a proposal to introduce into Canadian tax law a legislated anti-avoidance rule of general application. This rule has since come to be known as the "general anti-avoidance rule" or "GAAR". GAAR was introduced into the Canadian Income Tax Act (the "Tax Act") after many years of "cat and mouse" games between tax practitioners and tax policy makers, when Canada's tax policy makers seemed to be introducing, on almost a weekly basis, new, specific anti-avoidance rules aimed at the latest tax structure devised by clever Canadian tax practitioners. The need for such a rule of general application, at least from the tax policy makers' perspective, was evidenced by the repeated failure in the Canadian tax courts of the Canada Revenue Agency ("CRA") to apply concepts such as "sham", "substance over form", "economic substance" or "business purpose".

After 17 years, Canadian taxpayers and their advisers finally have guidance from our highest Court, the Supreme Court of Canada, on the application of GAAR. More specifically, on October 19, 2005 the Supreme Court of Canada released its decisions in The Queen v. Canada Trustco Mortgage Company ("Canada Trustco") and in Mathew v. The Queen ("Mathew ") . Both decisions were made by a unanimous court, with one decision falling in favour of the taxpayer and the other in favour of the Minister of National Revenue (the "Minister").

In the Canada Trustco and Mathew cases the Supreme Court of Canada indicated that the application of the GAAR involves a three step analysis. In its view, in determining whether the GAAR applies to a particular transaction or series of transactions, it must be determined whether: (i) there is a "tax benefit" that would arise from a transaction or series of transactions but for the application of the GAAR; (ii) the transaction is an "avoidance transaction", in the sense of the transaction not being "arranged primarily for bona fide purposes other than to obtain the tax benefit"; and (iii) there was "abusive tax avoidance", in the sense that it cannot be reasonably concluded that the tax benefit arising from the transaction or series of transactions would be consistent with the object, spirit or purpose of the provisions being relied upon by the taxpayer or of the Tax Act read as a whole.

The Supreme Court of Canada expanded on this third step by engaging in a two-part inquiry. The Court indicated that first, courts must conduct a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit, having regard to the scheme of the Tax Act, in order to determine why they were put in place and why the benefit was conferred. Second, courts must examine the factual context of the case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue.

The Supreme Court of Canada further held that the burden is on the taxpayer to refute points (i) and (ii) above, but the burden is on the Minister to prove the abusive tax avoidance. Whether the transactions were motivated by any economic, commercial, family or other non-tax purpose may form part of the factual context that the courts may consider in the analysis of the abusive tax avoidance allegations. The GAAR may be applied to deny a tax benefit only after it is determined that it was not reasonable to consider the tax benefit to be within the object, spirit or purpose of the provisions relied upon by the taxpayer. In the end, if the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer.

Perhaps even more importantly, the Supreme Court of Canada stated that the Tax Act "continues to permit legitimate tax minimization" and that one of its tasks in applying the GAAR is to ensure that it applies in a manner that achieves "consistent, predictable and fair" results so that "taxpayers may manage their affairs intelligently".

In Canada Trustco, the transaction at issue was a leveraged sale-leaseback in which capital cost allowance was claimed on accelerated write-off equipment acquired in a transaction structured so that the taxpayer had only minimal economic risk because of a significant prepayment of the lease amounts. The Supreme Court of Canada, in finding in favour of the taxpayer and against the application of the GAAR, characterized the transaction at issue as being an ordinary sale-leaseback and, therefore, found that it did not fall outside the "object, spirit or purpose" of the capital cost allowance provisions of the Tax Act, and that there was no clear and discernible policy that, in the absence of a specific at-risk rule, "cost" meant anything other than the outlay made, regardless of how the purchase of the asset was financed. The Court specifically rejected the CRA's argument that concepts such as "economic risk" should have any bearing on the computation of cost or the potential application of the GAAR. As such, the GAAR could not apply to disallow the tax benefit.

The facts in the companion case Mathew involved a series of transactions resulting in the transfer of a loss from an insolvent corporation, through a partnership, to taxpayers dealing with the corporation at arm's length. In general terms, the transactions at issue in the case involved the transfer of assets by the insolvent corporation to a non-arm's length partnership and the purported application of certain "loss-denial rules" generally applicable to non-arm's length transactions, and the subsequent acquisition of partnership interests by the taxpayers with a view to participating in the tax losses triggered on the disposition of the loss assets by the partnership.

The Supreme Court of Canada held that to allow the taxpayers to claim the losses would defeat the purposes of the relevant sections of the Tax Act. The Court held that the loss denial rules in the Tax Act preserve and transfer a loss under the assumption that a loss should not be realized for tax purposes on a non-arm's length transfer, but only on the subsequent realization of the loss by the transferee. In the Supreme Court of Canada's view, the use of these loss-denial rules to preserve and sell an unrealized loss to an arm's length party resulted in abusive tax avoidance.

The decisions of the Supreme Court of Canada have finally provided some much needed guidance at the highest level in the manner in which to apply the GAAR, and should assist taxpayers and their advisers to better rely on a consistent, predictable and fair application of the GAAR and the Tax Act.

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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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