Finance official indicates that s. 245(4.1) is not engaged where the legal and economic substance of transactions differs, and was not intended to upend the GAAR

Comments made by Trevor McGowan on proposed s. 245(4.1) included:

  • 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 whether or not to introduce 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.
  • 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.
  • 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.

Neal Armstrong. Summaries of 17 May 2023 IFA Finance Update under s. 245(0.1), s. 245(3)(b) and s. 245(4.1).