6 December 1995 Roundtable Q. 10, 9530390 - GAAR AND SAFE HAVEN RULES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

safe haven rules - gaar

Position:

question of fact

Reasons:

Tax Executives Institute
December 6, 1995

QUESTION 10 - GENERAL ANTI-AVOIDANCE RULE

Several sections of the Income Tax Act provide for different treatment depending on whether certain highly specific criteria, usually expressed as a numerical threshold, are met. These criteria are expressed in many forms, including time, percentage ownership, or composition of business. Specific examples include the one-year period under paragraph 15(2)(b), the 10 per cent test in the definition of corporations connected under subsection 186(4), and the 90 per cent de minimis rule in the calculation of FAPI under proposed paragraph 95(2)(a.1).

Assume that a taxpayer structures its affairs to meet the specific, numerical target entitling the taxpayer to favourable tax treatment. Would Revenue Canada concur that a taxpayer that so structures its affairs should not, by such action, be subject to the general anti-avoidance rule ("GAAR") described in section 245? For example, assume that in a particular year two corporations that do not wish to be considered "connected" for purposes of section 186 ensure that one corporation owns exactly 10 per cent of the issued share capital of the payer corporation and that such shares represent 10 per cent of the fair market value of the capital stock of the payer corporation. Assume also that paragraph 186(4)(a) was not met during the particular year. In such circumstances, would GAAR apply?

Department's Position

The determination of whether GAAR would be applied in any situation where a taxpayer structures its affairs in an attempt to meet the specific, numerical target which would entitle the taxpayer to certain favourable tax consequences will depend on the facts of the particular case and a review of the specific provision in question. For example, in its response to question 41 of the Revenue Canada Round Table at the 1989 conference of the Canadian Tax Foundation the Department indicated that the reacquisition of a loss property 31 days after its initial disposition would not generally result in a misuse of the superficial loss provisions or an abuse of the Act read as a whole since the transaction had been subject to the scrutiny of the specific provision of the Act but was clearly outside of its stated ambit. However, the Department has encountered other situations where a series of transactions has been structured to meet the specific, numerical target but it was evident that the transactions were being implemented in an attempt to circumvent the specific provision. In the Department's view, such attempts to circumvent a specific provision of the Act could be considered to result in a misuse of the specific provision of the Act or an abuse of the Act read as a whole.

With respect to the specific example cited, we are unable to provide an unqualified response without a full appreciation of the particular circumstances, including the reason that the parties do not wish the payer corporation to be "connected" with the shareholder corporation. However, we believe that in the situation where both the 10% of votes and value tests have been met, and the series of transactions does not include any additional steps which would result in the payer corporation subsequently becoming "connected" with the shareholder corporation, GAAR should not normally be applicable.

Author: T. Harris
File: 953039
Date: November 23, 1995