On August 4, 2023, the Department of Finance released draft legislation containing the most substantial overhaul of the general anti-avoidance rule (the GAAR) since its inception. The GAAR is aimed at thwarting abusive tax planning, particularly in cases where the technical requirements of the tax rules have been satisfied but the tax planning is contrary to the policy underlying the rules. The new proposals include:
- New Preamble: The introduction of a new preamble, the purpose of which is to address interpretive issues and ensure that the GAAR applies in the intended manner, while not forming part of its analytical framework.
- Avoidance Transaction: The GAAR applies only to transactions that meet the definition of an "avoidance transaction." The proposals significantly lower the threshold of this definition so that an "avoidance transaction" exists as long as "one of the main purposes" of a transaction is to obtain a tax benefit. Currently, an avoidance transaction requires that obtaining a tax benefit be the primary motivation for the transaction.
- Economic Substance:Canadian tax law is generally based on legal form rather than economic substance. The proposals introduce a new economic substance test that provides that avoidance transactions significantly lacking in economic substance are presumed to be abusive.
- Penalty:To discourage abusive tax planning, the proposals include a 25% penalty based on the amount of the increased tax payable as a result of the GAAR.
- The proposals add an exception from penalties where it can be demonstrated that it was reasonable to conclude at the time a transaction was entered into that the GAAR would not apply. However, this exception is limited to situations where it can be demonstrated that the conclusion was reasonable due to reliance on the transaction being "identical or almost identical" to a transaction that was (i) the subject of administrative guidance published by the Minister of National Revenue or another relevant government authority; or (ii) the subject of one or more court decisions.
- The penalties would not apply to tax attributes until those attributes are used to reduce tax payable.
- The penalties may not apply if the taxpayer discloses the transaction to the CRA. If a taxpayer voluntarily files a disclosure that a transaction is potentially subject to GAAR, it will not be treated as an admission that the GAAR applies in respect of a transaction.
- Limitation Period:The normal reassessment period for GAAR assessments would be extended by three years.
- The normal reassessment period will not be extended in cases where the taxpayer discloses the transaction to the CRA.
If passed into law, the proposals will apply to transactions that occur on or after January 1, 2024, except for the new preamble which will apply upon royal assent.
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