Does a GAAR Assessment Extend the Normal Assessment Period?

In Quinco Financial Inc. (2016 TCC 190; under appeal), the TCC concluded that interest starts to accrue as a result of a GAAR assessment for increased tax on the balance-due day rather than at some later time, such as the date of reassessment (see "Must a Taxpayer Self-Assess Under GAAR?" Canadian Tax Highlights, November 2016). This finding by itself might not be concerning, but the court went on to comment, apparently in obiter, that all taxpayers that are directly subject to GAAR assessments are required to consider and apply GAAR in preparing and filing their tax returns. This comment raises the scary possibility that the taxpayer's failure to apply GAAR on filing triggers an extension of the normal assessment period. A transaction subject to GAAR might never become statute-barred. Perhaps this interpretation was not the intention of the court; after all, the court explicitly stated that the nullification of the tax benefit of a transaction is the sole risk of a GAAR assessment. Still, it is worth exploring this possibility.

The normal reassessment period could be extended if the taxpayer's failure to apply GAAR on filing was regarded as a misrepresentation attributable to wilful default under paragraph 152(4)(a). In Regina Shoppers Mall (90 DTC 6427 (FCTD), aff'd. 91 DTC 5101 (FCA)), the FC stated that "[w]here a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152." The court quoted approvingly from the FC's decision in Reilly Estate v. The Queen (84 DTC 6001) the proposition that "the issue is not whether [the taxpayer], in forming his opinion at the material time was wrong, but whether [it] was attributable to neglect, carelessness or wilful default."

Thus, much depends on the circumstances of the taxpayer's filing. If a taxpayer knows that a similar transaction resulted in a successful application of GAAR, it will be difficult to argue that it had a bona fide belief that its filing position was the proper method. However, GAAR decisions have been decided in opposite ways in apparently similar situations, so the taxpayer's fact pattern would have to match a prior court decision fairly closely in order for this situation to occur.

The minister will have to prove that a statement that is technically consistent with the law (apart from GAAR) is nonetheless a misrepresentation or an omission. Recall that GAAR applies to arrangements that comply with a literal interpretation of the Act (Canada Trustco, 2005 SCC 54). As the SCC said in Copthorne (2011 SCC 63), "[i]f the tax benefit of the transaction or series was prohibited by the text . . . the Minister would only have to rely on the text and not resort to the GAAR."

The normal reassessment period could also be extended if the failure to apply GAAR on filing is held to be a false statement or omission made knowingly or in circumstances amounting to gross negligence (subsection 163(2)). A failure to apply GAAR could conceivably be an omission, but the minister would still have to show that the taxpayer acted intentionally or with indifference as to whether the law was complied with. This burden may be difficult to meet in a GAAR case where the taxpayer has expended significant time and effort to ensure that the technical provisions of the Act have been complied with in order to achieve the desired result.

The issue of GAAR self-assessment has been considered by the courts in the past with mixed results. In Copthorne (2007 TCC 481), the TCC found that there was nothing in the GAAR provisions that would allow a taxpayer to self-assess on the basis that GAAR applies. However, in STB Holdings Ltd. (2002 FCA 386), the FCA found that the limitation on self-assessment in subsection 245(7) applied only to third parties.

Carolyn Hogan
Parlee McLaws LLP, Calgary

Canadian Tax Focus
Volume 7, Number 2, May 2017
©2017, Canadian Tax Foundation