1. Legal and enforcement framework
1.1 Which legislative provisions govern tax avoidance in your jurisdiction?
Section 245 of the Income Tax Act RSC 1985 c1 5th Supp, as amended, contains the General Anti-Avoidance Rule (GAAR). The GAAR was introduced by the Canadian Parliament as a statutory tool to prevent and combat the growth of aggressive tax avoidance transactions. The Income Tax Act also contains specific anti-avoidance rules, examples of which can be found in Sections 55(2), 75(2), 84.1, 95(6), 103(1) and 247(2).
1.2 Which bilateral and multilateral instruments on tax avoidance have effect in your jurisdiction?
The Canadian government has generally accepted the approach to tax avoidance as developed by the policies of the Organisation for Economic Co-operation and Development. Treaties and conventions provide the legislative mechanisms to report transactions that may fall foul of the GAAR. In addition to reporting, there are distinct principles that apply to curbing abusive transactions, including the potential imposition of financial penalties.
1.3 What authorities are responsible for enforcing the applicable laws and regulations? What statutory powers do they possess?
The Canada Revenue Agency (CRA) is responsible for the administration of the Income Tax Act. The Federal Department of Justice enforces the applicable laws and regulations. A taxpayer can challenge an assessment or reassessment and ultimately such challenges can end up before the Tax Court of Canada. Decisions of the Tax Court of Canada can be subject to appeal to the Federal Court of Appeal. If dissatisfied with the decision of the Federal Court of Appeal, either party can seek leave to appeal to the Supreme Court of Canada.
1.4 What is the general approach of these authorities in enforcing the applicable laws and regulations?
In Canada, the GAAR Committee was first established in 1988 as a non-statutory advisory body of the CRA. The GAAR Committee has a broad range of membership, including:
- senior CRA officials; and
- representatives from both:
-
- the Department of Justice; and
- the Department of Finance.
The committee's primary function is to review the application of the GAAR in respect of proposed reassessments arising from audits. The committee also considers the application of the GAAR in requests for advance income tax rulings.
1.5 To what extent do these authorities cooperate with international counterparts and other agencies in enforcing the applicable laws and regulations?
There is extensive and substantial cooperation between the Canadian revenue authorities and international counterparts and agencies. One of the key methods of cooperation is through tax information exchange agreements, which assist the revenue authorities in tracking and investigating potential tax avoidance transactions.
2. Tax avoidance activities
2.1 What activities constitute tax avoidance in your jurisdiction?
Potential tax avoidance transactions that have resulted in reassessments by the Canada Revenue Agency (CRA) include:
- the acquisition of non-capital losses via a partnership transfer;
- an artificial increase in paid-up capital;
- loss trading;
- surplus stripping;
- leveraged cash donation arrangements; and
- treaty shopping.
2.2 Are there any restrictions or thresholds (eg, in terms of parties, asset type or transaction value) that serve to limit the types of activities that constitute tax avoidance?
The seminal case that sets out the criteria for applying the General Anti-Avoidance Rule (GAAR) is Canada Trustco 2005 SCC 54. There are three requirements for the GAAR to apply:
- a tax benefit resulting from a transaction or part of a series of transactions:
- an avoidance transaction that would result directly or indirectly in a tax benefit; and
- a determination that the tax benefit would be inconsistent with the object, spirit or purpose of the provisions relied upon by the taxpayer – in other words, a misuse or abuse of a specific provision.
2.3 What specific concerns and considerations should be borne in mind in relation to the following activities to avoid falling foul of the tax avoidance rules? (a) Transfers of assets abroad; (b) Transfers of income streams; (c) Securities transactions; (d) Land transactions; (e) Trade; (f) Cross-border tax planning; (g) Other.
The Canadian GAAR landscape is filled with cases that are split on whether the GAAR was correctly applied by the CRA. These cases can be easily found by searching the databases of:
- the Tax Court of Canada;
- the Federal Court of Appeal; and
- the Supreme Court of Canada.
3. Scope of application
3.1 Are there differences in treatment for civil and criminal tax assessments?
There are different treatments for civil and criminal tax assessments or reassessments. Tax offences are found in Sections 238 and 239 of the Income Tax Act. Tax avoidance can result in financial penalties but it does not result in a criminal process or result.
3.2 Can both individuals and companies be prosecuted under the tax avoidance legislation?
Both individuals and corporations can be reassessed for tax avoidance.
3.3 Can foreign companies be prosecuted under the tax avoidance legislation?
Third parties can be subject to tax avoidance reassessments.
3.4 Does the tax avoidance legislation have extraterritorial reach?
While not having direct extraterritorial reach, information can be shared and supplied by the Canada Revenue Agency to foreign counterparts and vice versa, leading to General Anti-Avoidance Rule reassessments.
3.5 Does the tax avoidance legislation extend to parties that promote or facilitate tax avoidance?
Almost 15 years ago, the Canadian government introduced a new reporting regime that was aimed at aggressive tax planning transactions. The rules contained in Section 237.3 of the Income Tax Act apply to such transactions entered into since 2010. If the ultimate reassessment is supportable, the taxpayer could face a very hefty financial penalty.
4. Compliance
4.1 What best practices should a taxpayer follow to mitigate the risk of tax avoidance violations?
It may seem obvious or trite to state that a taxpayer should seek professional tax advice before implementing a transaction. It is best to 'test' whether the transaction could be considered a General Anti-Avoidance Rule (GAAR) 'problem'.
4.2 Are taxpayers obliged to report instances of potential tax avoidance or other irregularities?
Taxpayers and their advisers now have reporting requirements, which are set out in the Income Tax Act.
4.3 What other concerns and considerations should be borne in mind from a compliance perspective?
In Canada, taxpayers can seek an advance tax ruling before carrying out a transaction. Although this is not a fast process, it is a method of ensuring that the transaction clears the application of the GAAR.
5. Enforcement
5.1 Can taxpayers that voluntarily report tax avoidance violations or cooperate with investigations benefit from leniency in your jurisdiction?
There is no guarantee, but cooperation with the Canada Revenue Agency (CRA) is in the best interests of the taxpayer. Professional tax advice is the first step in determining how best to interact with the revenue authority. The Voluntary Disclosure Program grants relief on a case-by-case basis, but this is limited to taxpayers that come forward to fix errors of omissions in their tax returns before the CRA knows or contacts them about it. Thus, the taxpayer is likely to know in advance whether the transaction in issue raises the prospect of a tax avoidance violation.
5.2 What defences are available to taxpayers charged with tax avoidance violations?
A limited number of defences are open to a taxpayer in the event that a tax avoidance reassessment is issued. Presumably, the starting point will be that the General Anti-Avoidance Rule does not apply and therefore the transaction or transactions in issue do not result in a misuse or abuse of a tax provision. In other instances where tax avoidance is raised, the taxpayer can consider the defences of:
- due diligence; and
- reliance on good faith.
5.3 Can taxpayers negotiate a pre-trial settlement through plea bargaining, settlement agreements or similar?
Where a taxpayer unsuccessfully challenges a reassessment and thus brings a further challenge by filing a notice of appeal with the Tax Court of Canada, there is always the opportunity to settle. Settlement is dependent on numerous considerations. If the parties agree (and even if they do not), the taxpayer can request a settlement conference presided over by a judge of the Tax Court of Canada.
5.4 What penalties can be imposed for tax avoidance?
There are financial penalties for tax avoidance.
5.5 What is the statute of limitations for prosecuting tax avoidance in your jurisdiction?
The Income Tax Act allows for statute-barred years to be opened on the basis that the taxpayer:
- made any misrepresentation that is attributable to neglect, carelessness or wilful default; or
- has committed any fraud in filing the return or supplying information under the Income Tax Act.
Because of these provisions found at Section 152(4) of the Income Tax Act, there is a low threshold for maintaining the 'normal' reassessment period.
6. Alternatives to prosecution
6.1 What alternatives to prosecution are available to enforcement agencies that find tax avoidance?
Tax avoidance is not a crime, per se. Tax evasion is a crime. There is a separate regime for dealing with tax evasion. General Anti-Avoidance Rule (GAAR) reassessments will be dealt with by the Tax Court of Canada. Tax evasion cases are subject to the jurisdiction of the provincial court system. The Department of Justice lawyers deal with tax avoidance cases. The Office of Public Prosecutions, and specifically the federal Crown prosecutors, deal with tax evasion charges.
6.2 What procedures are involved in concluding an investigation in such a way?
Generally, the Canada Revenue Agency (CRA) auditors follow the directions provided in the Technical Operations Manual. Once an audit is finalised, it is then subject to review by the GAAR Committee. If the committee approves the audit and the proposed GAAR reassessment, it will then be issued by the CRA. Thereafter, if the taxpayer files a notice of objection, it is possible that an embedded Department of Justice lawyer may be called upon to assist in any deliberations at the CRA appeals division stage. If the CRA's position remains as originally reassessed and the taxpayer's objection fails, the taxpayer can then appeal to the Tax Court of Canada.
6.3 What factors will determine whether such an alternative to prosecution is to be offered by an enforcement agency to those who have been involved in tax avoidance?
The CRA assumes that by the time the audit has been submitted to the GAAR Committee, sufficient facts have been gathered to support the GAAR reassessment. As the taxpayer proceeds to challenge the reassessment and more facts are known, it is possible that the CRA may consider possible offers of settlement.
6.4 How common are these alternatives to prosecution?
An alternative to the continuation of the appeal process is settlement. The possibility of settlement usually depends on both new and unknown facts discovered after the initial audit. In some instances, counsel for the taxpayer can make a compelling argument based on:
- the current state of the case law; and
- the particular facts of the transaction in issue.
6.5 What reasons, if any, could lead to an increase in the use of such alternatives?
If a set of facts and law mirrors a recent successful taxpayer challenge of a GAAR reassessment, the Department of Justice counsel assigned to the tax case may be more willing to consider proposals to settle the tax appeal.
7. Cyber and crypto assets
7.1 How does the tax avoidance regime dovetail with cyber law in your jurisdiction?
Canada has much work to do in relation to tax avoidance and cyber law. The Canadian Centre for Cyber Security is Canada's technical authority in respect of cybersecurity. The centre works closely with federal government departments, Canadian businesses, infrastructure interests and international partners to respond to, mitigate and recover from cyber events.
According to the National Cyber Threat Assessment 2025–2026 (information available as of September 2024), there are cyber threats from state adversaries including China, Russia, Iran, North Korea and India. The centre has identified five trends that will continue to effect Canada's threat environment until 2026:
- the use and threat posed by AI technologies;
- evolving cyber threat actor tradecraft;
- the growing threat of non-state actors;
- vendor concentration; and
- dual use commercial services.
7.2 Does the tax avoidance regime extend to crypto-asset activity and if so, how?
The Canada Revenue Agency is fully aware of the potential for tax avoidance as a consequence of the proliferation of crypto-asset activity. In this regard, more effort and audit work has been instigated and performed in the reporting of crypto sales.
7.4 What specific considerations, concerns and best practices should companies be aware of with regard to tax avoidance and the cyber sphere?
There are multiple government resources that can help corporations to develop and enhance methods to be aware of tax avoidance schemes in the crypto-asset environment.
8. Trends and predictions
8.1 How would you describe the current tax avoidance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The Liberal government has been in power for almost 10 years, with Justin Trudeau serving as prime minister. The current government has been prorogued until 24 March 2025. In the interim:
- the Liberal Party will elect a new party leader;
- Justin Trudeau will resign; and
- the new leader will become the next prime minister of Canada.
Undoubtedly, an election will follow. If current polls are to be believed, the Liberals will be defeated and a new government led by the Conservatives will come to power. Exactly how this will impact on fiscal and tax legislation is anyone's guess. Plainly, the Conservatives are in favour of less bureaucracy and lower taxes. At the same time, the new government will be faced with an enormous budget deficit. How tax policy will be effected and implemented over the next 12 to 24 month calls for speculation.
In the meantime, several tax cases raising the issue of GAAR are likely to make their way to the Supreme Court of Canada. Economic substance has now received the attention it richly deserves in the context of a GAAR analysis by the courts. Whether there will be further legislative efforts to curb anti avoidance transactions remains to be seen.
9. Tips and traps
9.1 What are your top tips for ensuring full compliance with the tax avoidance regime and what potential sticking points would you highlight?
Similar to other areas of tax law, General Anti-Avoidance Rule (GAAR) provisions are evolving. In some instances, the proposed legislative changes will add greater clarity to those potential transactions that would fall foul of the GAAR. The role of the concept of economic substance and how it impacts on the application of the GAAR is in the early stages of case law development. It is in the best interests of a taxpayer planning to carry out a transaction that involves, at a bare minimum, a tax benefit and a series of transactions to obtain the advice of tax counsel in order to determine whether there is the risk of a misuse or abuse of a specific provision of the Income Tax Act. Once that analysis is complete, the taxpayer can then assess whether the risk is worth the execution of the transaction.
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.
