17 May 2023 IFA Finance Update

First 2 paras. are restatements from original GAAR materials

• The first two paragraphs in s. 245(0.1) were restatements of those made contemporaneously with the introduction of the GAAR. The first reflects a statement made in the whitepaper, that taxpayers should of course be allowed to receive benefits intended by Parliament.

Change to “one of the main purposes” test modernized the test

• There were suggestions in obiter dicta that, if there is a transaction that secured a foreign tax benefit of $60 and a Canadian tax benefit of $40, that may not be an avoidance transaction; but if the exchange rates change and the same transaction occurred again but with a larger Canadian tax benefit, that would then be an avoidance transaction. We considered adding “avoidance of foreign tax” to the test, but ultimately concluded that adjusting the avoidance transaction test to “one of the main purposes” would ensure a better balance.
• The test still has a gatekeeping function – avoidance still must be one of the “main” purposes – before getting to the “misuse or abuse” analysis, but this represents a more modern approach to avoidance transaction rules, and gets around some of that analytical uncertainty in situations where there are multiple purposes, leading to an artificial exercise in picking the “winner” from among those purposes.

Object was to introduce an economic substance component without upending GAAR

• It was part of the elected government’s election platform and part of the Prime Minister’s mandate letter to the Minister of Finance to update the GAAR, including through the introduction of an economic substance component. Accordingly, there was no question of introducing an economic substance component – rather, it was a question of how to do so while not at the same time upending the GAAR rule and throwing out 30 years of caselaw.

Test of whether there is a vacuous transaction

• S. 245(4.1) is not engaged where there is a mismatch between the economic and legal substance of a transaction, e.g., where there is a sale and repurchase of an asset that economically is a financing, and it instead is engaged where there is a lack of economic substance to the transactions, i.e., where there is virtually nothing that is really happening, for example, just a circular flow of funds with no change in anybody’s economic position.
• Whether there is a change in economic position may be guided by whether there is a change in the opportunity for making profit or in the risk of loss.

Application of listed factors depends on the circumstances

• No one of the listed factors in s. 245(4.1) will be dispositive in every case, and depending on the circumstances some may be more relevant than others.