GAAR at 25: Lessons Learned and Current Challenges
On September 26, 2013, the Canadian Tax Foundation hosted a seminar
commemorating 25 years of GAAR. This seminar was marked by conflicting
views on whether GAAR has evolved, and whether it has operated as an
effective deterrent. The panellists agreed that applying GAAR involves
an element of uncertainty and that taxpayers should plan accordingly.
The diverse group of panellists who participated in the seminar
included Justice Sharlow of the FCA; Justice Boyle of the TCC; Phil
Jolie, former Director General of the Rulings Division at the CRA;
Patricia Lee of the Department of Justice; Shawn Porter, who was
previously seconded to the Department of Finance and is currently at
Deloitte LLP; and Ed Kroft of Blake Cassels & Graydon LLP.
Pooja Samtani of Osler Hoskin & Harcourt LLP and Justin Kutyan of KPMG Law LLP served as moderators.
At the outset, the moderators questioned the extent to which GAAR had
evolved since its inception. Justice Sharlow observed that although the
principles regarding purposive interpretation were first enunciated in Stubart Investments Ltd. v. The Queen
( 1 SCR 536), the courts have only recently applied that approach
to interpreting the Act in non-GAAR cases. The panellists generally
agreed that in the future, the focus will be on applying the "misuse and
abuse" analysis, although the burden on the Crown may evolve over time.
Given the types of cases that are currently under appeal, there may
also be a renewed focus on the "avoidance transaction" element of the
test, which has otherwise not received as much attention.
An Effective Deterrent?
Although there was consensus that the courts have yet to formulate
more specific principles regarding the application of GAAR, the
panellists were split on whether GAAR has been effective. Phil Jolie
observed that the CRA continues to see a significant number of
strategies and transactions that he had expected GAAR to curtail.
Patricia Lee noted that 44 GAAR cases are currently in the system
(either at the appeals stage or before the TCC), addressing a host of
issues that range from loss trading to cross-border surplus stripping.
Ed Kroft disagreed with Phil Jolie, stating that GAAR has served as an
important deterrent, particularly for taxpayers who fear reputational
risk and for professional advisers who fear class action claims and the
imposition of third-party civil penalties.
When reviewing the practical implications of GAAR, the panellists
agreed that GAAR analysis is inherently uncertain. Justice Boyle
confirmed that this uncertainty is unavoidable and constitutes the
principal challenge for taxpayers who are confronted with GAAR
assessments. Justice Sharlow similarly acknowledged that GAAR analysis
is fact-driven, which contributes to the overall ambiguity surrounding
the analysis. She noted, however, that despite any instinctive reactions
that may be triggered by the factual context, judges consciously choose
to be guided by the prescribed framework.
To deal with the uncertainty that appears to have become synonymous
with GAAR, Justice Sharlow advised that practitioners proactively
consider the prospect of GAAR litigation during the planning phase. Ed
Kroft added that a taxpayer should make provision for GAAR disputes that
may occur in the future by planning for the costs of litigation and
preserving the requisite evidence. Shawn Porter recommended that parties
keep an eye on legislative developments that may shape a future GAAR
analysis, observing the difficulty that legislators face in drafting new
provisions that must then work harmoniously with existing provisions.
The panel discussion made it clear that this is an exciting time for
those entering the profession. GAAR, despite being old enough to have
completed a professional degree, is still very much in its infancy.
Fasken Martineau DuMoulin LLP, Toronto