7 March 2019 CTF Seminar - General Anti-Avoidance Rule: Past and Future
This summarizes answers to some of the questions posed to Alexandra MacLean (Director General, International and Large Business Directorate, CRA) at a seminar of the Canadian Tax Foundation held in Toronto on 7 March 2019 in a segment entitled "Predictions for the GAAR: The Next 30 Years.” The moderator was Mark Brender (Oslers) and the other presenters were Justine Malone (Justice) and Julie D'Avignon (Stikeman).
Policy abuse analysis
Question: How do you apply a textual, contextual and purposive approach to the GAAR?
MacLean: Uncertainty is, in some ways, inherent to any anti-avoidance rule, but managing that uncertainty is a priority for CRA and the GAAR committee has been useful in that respect. At the same time, I am sympathetic to the argument that the GAAR committee is analogous to relying on “one guy with a microscope” and that the subjectivity can be nerve-wracking for taxpayers.
However, I don’t think there is anything mystifying about the policy of the Act. The main theme of the Act is to faithfully measure its tax-base, which is income. There are some exceptions to that theme, such as the delivery of an incentive program, but those tend to be clearly signposted. Beyond that, practitioners and CRA and Justice should keep in mind that we are ultimately trying to measure income. Where the Act deviates from accounting income, it is usually because the accounting rules provide a reason to, for example, under-reporting a figure in a way that would be antithetical to the proper measurement for tax purposes.
Again, there should be nothing mystifying about the question of policy abuse. If you’re counting something twice; if you’re pulling a tax attribute out of thin air; those are the sorts of things that tend to get you into GAAR territory.
It is a priority of CRA to be reasonable in GAAR assessments, although there is also a certain quid pro quo that we need but don’t have yet. We want reasonable results in a fair and efficient tax system. One thing I think about in my role is our duty to the average taxpayer, who pays a lot of taxes on services and has most income deducted at the source, which means that there is also unfairness if we fail to reassess when we should.
Innovations and update on CRA approaches
Question: What can you say about recent developments at CRA?
Risk assessment and information-sharing
MacLean: Technology is increasingly important, including automated risk-assessment. “Risk-assessment” is basically shorthand for picking files to audit. We use algorithms to essentially give us a list, and we eyeball the list, and make adjustments. The process is proving a success.
CRA is also able to pursue more files. There has been a small increase in the number of GAAR assessments. We have better information coming from other countries coming out of the BEPS process. We are analyzing the exchanged rulings, and some things certainly jump out at us. The exchange of unilateral APAs seems to have coincided with a decline overall in lateral APAs, but that is not our issue. Country-by-country reports are another interesting source.
The point is that we are finding more things, and applying GAAR somewhat more often. That may continue. We do have more resources than in the past, and we focus particularly on areas of higher risk. This government is focused on tax evasion and aggressive tax avoidance. That may continue or may change, but at least we have done quite a lot on the technology side.
Involving lawyers earlier in audit
MacLean: I come from the Department of Finance, which was replete with lawyers, and I was always scrounging around trying to find an accountant. I really think that tax is multidisciplinary (if you can call two disciplines “multi”), and I think you need a healthy mix of the two. At CRA, I have arrived at a place that has lots of accountants and fewer lawyers. We are making progress in that, engaging additional lawyers through various means. One initiative is called Counsel at Audit Stage, through which CRA is providing increased resources to the Department of Justice to make lawyers more accessible for our auditors earlier in the process, and also not only to the solicitor side at Justice but also the litigation side for cases which we can predict are likely to make their way to court eventually. An HR policy change has also allowed us to hire lawyers as auditors.
Our overall objective there is to have sustainable reassessments. I think that’s something that we could have consensus on in the tax community - that raising a reassessment that is not ultimately going to be sustained in the litigation process is very inefficient. That is frustrating for taxpayers and for CRA. How does that tie into GAAR? We have heard some calls for more GAAR jurisprudence, and I think we are set to deliver on that!
Evolution of the GAAR Committee
MacLean: I agree with Brian Ernewein when he says that, notwithstanding the different formal roles on the Committee, the group is pretty collaborative, and we’re not shy about pointing out litigation, policy, or technical issues to each other.
Originally, all GAAR cases went to the Committee. Now there’s an established body of structures that the Committee has already weighed in on, and there is typically no need for the Committee to revisit those. (They do still come to Headquarters.)
The GAAR Committee therefore looks at fewer matters than it used to, meets less frequently, and there is a greater tendency to send technical people rather than the named Committee representative. Those are some changes that I have observed over my time on the government side.
Screening GAAR referrals to the Committee
MacLean: If an audit team proposes raising GAAR, there is a mandatory referral to the Abusive Tax Avoidance Division at Headquarters. They do a rigorous assessment. Where GAAR is clearly warranted or unwarranted under the jurisprudence, the proposal does not continue to the GAAR Committee.
Of course, the screening process technically begins even earlier, with the audit team’s decision on whether to refer the matter to Headquarters in the first place, so that it is possible that some things get missed – which is to say that, from a taxpayer perspective, things could certainly be worse!
Whether the GAAR Committee is still needed
MacLean: Rulings chairs the Committee.
I think it is still performing a useful role in encouraging consistency. It has been a model for a number of other committees over the years at CRA, and maybe some of the firms as well, from what people are saying. We now have an Audit File Resolution Committee, which considers proposals to resolve tax disputes at the audit stage. We have been running that for about a year, and it is largely modelled on the GAAR Committee.
We had a new communique out to our auditors, which should be on our website fairly soon, that talks about what we call audit agreements – that’s a settlement at audit stage – what’s involved and when we engage that process.
Question: Should taxpayers be allowed to attend the GAAR Committee?
MacLean: That is ultimately up to Rulings, but I would say a couple of things.
Taxpayers have quite a few opportunities throughout the process to make representations. Certainly, the Committee considers written representations, and does so carefully. The Question seems to be whether there should be in-person representation.
The GAAR Committee is not really a quasi-judicial committee. There’s an opportunity for oral representation at Tax Court through the litigation process. If the Committee itself were also made to act more like a tribunal, that would impinge on its timeliness, and I don’t think anyone wants to prolong the resolution process even further.
Generally, we are looking for ways to make the process shorter where we can.
Brender: I think it’s important to have taxpayer representatives at least be there to field Questions. Written communication is not an effective way to address certain emergent Questions – such as whether particular words or statements under consideration are being taken out of context.
Therefore, some representation for specific purposes could ensure that the committee decides on a more informed basis.
MacLean: Taxpayers have a decent level of access to CRA officials, both beforehand at the audit stage and afterwards at Appeals. Appeals also takes representations from taxpayers and talks to taxpayers on the phone and at meetings. If the file makes it to the Department of Justice, there is a whole new dialogue there. There are a lot of existing mechanisms in the system for taxpayers to clear up the kind of confusion you describe.
Future GAAR jurisprudence
Question: Is there any emerging issue that is likely to generate GAAR jurisprudence in the near future?
MacLean: When we were planning this panel, we thought we’d set up an interesting contrast between cases about to be litigated and cases we are currently auditing. It turns out there isn’t much of a gap there. We are seeing the same stuff at audit that was just litigated. That does suggest to me that we are not really changing behaviour much, but I’m just an administrator!
Specific anti-avoidance rules
Question: Is there any friction between the GAAR and specific anti-avoidance rules (SAARs)?
MacLean: I think we have learned to live with the interaction of SAARs and the GAAR and it is tolerably harmonious right now. We are going to try to use what works.
One interesting topic is SAARs that came about in response to GAAR cases. Another is that the GAAR Committee sometimes identifies structures that are abusive in a real sense but not amenable to the GAAR for some reason, such as an overriding business purpose.
There is a lot of interaction between GAAR and SAARs, and not always happy interaction from the government’s perspective.
Question: What are your views on adding a penalty provision to s. 245?
MacLean: I don’t have views on whether there ought to be a penalty, but I do have one observation about Brian Arnold’s proposal, which as I understood it was that penalties could apply, but at a judicial level only: the majority of GAAR cases don’t actually go to court. Nowadays, they mostly get resolved at audit, so a judicially applied penalty would arise only in a minority of GAAR situations.