What is GAAR?

The full name of GAAR is “The General Anti-Avoidance Rule” and it can be found in section 245(2) of the Income Tax Act. If a transaction or series of transactions is tax deducted, avoided or deferred, and such transactions or series of transactions are not performed for any primary purpose in order to obtain tax benefits, such tax consequences may be invalid.

What is the purpose of GAAR?

Canada Revenue Agency (CRA) uses GAAR to enhance their ability to target and challenge possible tax avoidance and / or abuse.  They use GAAR when tax planning strategies may be within the ITA rules but not within the ‘spirit’ of those rules.

What are the GAAR tests?

The Canadian Supreme Court made a three-point test in determining whether GAAR applies.

1st test – Does the transaction or series of transactions generate tax benefits?

• This test will almost always be met as CRA would likely only challenge transactions that created a tax benefit.

2nd test – Has the transaction been identified as an avoidance transaction?

• This test addresses whether the main purpose of the transaction was to obtain tax benefits.  If there was another purpose (business or other) of the transaction, then this test may not be met.

3rd test – Is the transaction abusive?

• “Abusive” is challenging to define and to prove.   It depends on whether the transaction is inconsistent with the object, purpose, or spirit of the tax laws being used by the taxpayer to obtain the tax benefit.

In 2024, Bill C-59 introduced significant changes to the enforcement of the General Anti-Avoidance Rule (GAAR). These changes include the addition of a preamble clarifying GAAR’s purpose, the imposition of stricter penalties for abusive tax avoidance, and a clearer focus on the economic substance of transactions. These updates are designed to close loopholes and strengthen the CRA’s ability to challenge aggressive tax planning strategies, making it more difficult for taxpayers to engage in tax avoidance schemes without facing serious consequences.

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Author: Simran Sandhu, April 2019

September 2024