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
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.
Parlee McLaws LLP, Calgary