Subsection 245(4.1)

Table of Contents

Subsection 245(4.1)
Administrative Policy(2)
Articles(2)

Administrative Policy

26 November 2023 CTF Conference - "The Future of the GAAR"

overview of proposed changes

Points made by Trevor McGowan on the new GAAR rules included:

  • The introduction of the economic substance rule in s. 245(4.1) was intended to counter what may be an existing default approach towards dealing with economic substance, arising from Canada Trustco, of considering that a lack of economic substance is generally irrelevant, unless the provisions otherwise indicates - so that economic substance now is relevant.
  • The tests in s. 245(4.1)(a) to (c) need to be applied holistically to the transactions as a whole.
  • Other than the change of indicating that economic substance has some relevance (which he would not want to portray as an inconsequential change) there is essentially no change to the GAAR analysis.
  • He provided a detailed run-down of why the typical exchangeable share deal would satisfy the economic substance tests in s. s. 245(4.1).
  • He did not state that there is no general due diligence defence (see Consolidated Canadian Contractors and progeny) to the new penalty (in addition to the narrow defence in s. 245(5.2)), even though invited to comment on this point.

17 May 2023 IFA Finance Update

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.

Articles

Joint Committee, "GAAR Proposals and Self-Help Transactions", 13 October 2023 Joint Committee Submission

suggested list of examples of transactions which should not be considered to be a GAAR abuse
  • The Explanatory Notes examples regarding s. 245(0.1)(a) (RRSP contributions and accelerated CCA claims) do not reflect that many tax planning strategies utilize a series of transactions which navigates around inappropriate tax consequences in ways that likely were not specifically contemplated by Parliament.
  • The Explanatory Notes should clarify that tax benefits may be achieved through transactions undertaken by taxpayers which benefits were not specifically contemplated by Parliament, but which may not be considered to result in a misuse or abuse.
  • It would be helpful if the Explanatory Notes included examples of acceptable transactions, for example, the following:
  1. Those identified in IC88-2 and the IC88-2 Supplement.
  2. Post-mortem pipeline transactions.
  3. PUC distributions to non-resident shareholders of Canadian-resident private corporations.
  4. The use of a Bidco to step-up PUC to fair market value in the purchase of a Canadian corporation.
  5. Acquiring 10.1% of the relevant shares of a corporation so that Part IV tax is inapplicable.
  6. The use of cash damming and other tracing techniques where funds-tracing is relevant.
  7. Debt-slide (a.k.a., ATR-66) transactions.

Joint Committee, "Summary of Comments and Recommendations Provided to the Department of Finance on the General Anti-Avoidance Rule Proposals Released on March 28, 2023", Joint Committee Submission dated 7 June 2023

Need for further examples

  • In addition to the TFSA example provided by Finance, other examples of transactions without a high level of economic substance are loss consolidation transactions and post-mortem planning. There should be more specific and substantive examples provided on how the government believes that economic substance considerations should be integrated into the determination of whether the GAAR applies.

Comparison test in s. 245(4.1)(b)

  • The test in s. 245(4.1)(b) - of comparing expected tax benefits and expected non-tax economic return - will be difficult to apply where the latter are difficult to quantify.

“Substantially all” test in s. 245(4.1)(c)

  • The reference in s. 245(4.1)(a) to “all or substantially all” (a phrase generally interpreted by CRA to reference a 90% threshold) also may establish a quantitative test that is difficult to apply.

Navigation