I. Introduction:
Since 1988, Canadian tax pundits commonly retreat from opining on whether the Minister of National Revenue will successfully reassess any given taxpayer benefits arising from any novel series of tax avoidance transactions, with the ever-elusive, potentially omnipotent, and philosophically teleological, general anti-avoidance rule, [hereinafter, “GAAR”]. GAAR supplements numerous other specific anti-avoidance provisions [hereinafter, “SAAPs”] of the Income Tax Act and, therefore, is a provision of last resort after the application of SAAPs.
Like any provision, legal application often requires judicial interpretation, which ought to be in light of the legislative intent behind its enactment. The legislative intent behind this remedial statute was to benefit the tax base by detering or “prevent[ing] abusive or artificial tax avoidance schemes, without interfering with legitimate commercial and family transactions.” Collateral costs for the prevention of such “abuse”, however, suggest that the prevention itself may be disproportionately abusive. Some consequences, include and are not limited to:
[1] uncertainty in Canadian taxation;
[2] dousing of transactional innovation and commercial progress;
[3] barriers to entry for foreign direct investment;
[4] rendering Canadians globally less competitive;
[5] erosion of the rule of law;
[6] exorbitant professional fees;
[7] disproportionate increase in court congestion;
[8] hampering access to justice, further entrenching the elite’s oligopoly on tax avoidance; and
[9] redistribution of the proportionate tax burden to the poor and middle class.

[1] The general anti-avoidance rule [hereinafter “GAAR”], found in Part XVI, section 245 Ss. 245(3) and (4) [Income Tax Act, R.S.C. 1985, c. 1 (5th Supp)], [hereinafter, the Act”], was enacted as part of the 1987 Tax Reform. It codifies the factual and legal requirements for the Minister of National Revenue to reassess a taxpayer for “abusive” tax avoidance.

[1] See, for example, XCO Investments Ltd. et al. v. The Queen 2005 DTC 1731 (TCC), at paragraph 40; (affirmed by 2007 DTC 5146 [FCA]), where Bowman, C.J. said “Where a specific anti-avoidance section covers a transaction but does not in the Minister’s view provide a remedy that the Moinister considers sufficient, section 245 is not there to permit the Minister to top up the remedy that the Minister believes to be inadequate.”

[1] Citing the Department of Finance’s Hisorical Explanatory Notes to the Act, Bill c-139; S.C. 1988, c.55, s.186; also, please refer to CCH Tax>Federal Income Tax> Canadian Income Tax Act>Historical Explanatory Notes to the Act>section 245>[General anti-avoidance rule]> (2) General anti-avoidance provision; also, please refer to The 2004 Federal Budget, Annex 9—Tax Measures: Supplementary Information and Notice of Ways and Means Motion (General Anti-Avoidance Rule)
Despite these consequences, this article is not meant as an apology for or against GAAR, nor is it an attempt to defend any particular perspective of what “non-abusive”—and hence, acceptable—tax avoidance is or ought to be. Rather, it is an attempt to prepare the international tax professional to grapple with the inherent difficulties of navigating Canada’s burgeoning doctrines regarding tax avoidance, predicated upon oscillating and competing perspectives and interests. While not meant as an exhaustive treatment of GAAR, it does canvass the progression of GAAR, as it relates to law and policy, drawing upon primary contributions of Parliament, the Department of Finance, the Canada Revenue Agency [hereinafter, the “CRA”], and the Supreme Court of Canada. Specifically, it is meant to serve as an introductory, concise, and yet eclectic guide to the most relevant concepts and concerns as they relate to Canadian taxpayers, both at home and abroad.
II. Inception & Evolution
The ironic tautology that marks GAAR’s evolution is that the very same judicial anti-avoidance principles enunciated by the Supreme Court over 20 years ago –the perceived misgivings of which were probably the catalyst behind Parliament’s enactment of GAAR–have now been reincarnated in today’s most seminal Supreme Court rulings, and are merely cloaked in an array of synonyms.

It would seem that a kind of schizophrenic legal duplicity is being forged over time. On one hand Parliament seems to have lacked confidence in the Supreme Court’s more expansive doctrinal approach to tax avoidance preceding GAAR. On the other hand, the Supreme Court seems to be shunning Parliament in a less than unanimous judicial repeal of Parliament’s intended restrictiveness to tax avoidance in GAAR, through legal hermeneutics and jurisprudential gymnastics. We are now two decades into a tug-o-war that challenges Canada’s monistic “rule of law” in general, and threatens Canadian tax law, in particular.
Ultimately, GAAR is more than a statutory remedial regime to prevent “abusive” tax avoidance. It is an over-intellectualized process of national catharsis, reflecting highly divergent interests, and cultural and philosophical attitudes regarding whether and to what extent there can ever be ethical tax avoidance, even given strict letter-of-the-law compliance.

See Stubart Investments Ltd. v. The Queen [1984] CTC 294, 84 DTC 6305 (SCC) [hereinafter, “Stubart”], where Estey, J.’s averred that an “object and spirit test” would serve as an effective anti-avoidance doctrine, which was their rejection to the predecessor doctrine, known as the “business purpose test”.

[1] See The Queen v. Canada Trustco Mortgage Company [2005] SCC 54 [hereinafter, “Canada Trustco], and Mathew v. The Queen, [2005] SCC 55 [hereinafter, “Mathew”].

III. Application: Practical & Theoretical
In the most pivotal judgment on GAAR, the Supreme Court in Canada Trustco formulated a trilateral set of interconnected requirements, all of which must be met in order for the Minister to justify GAAR as the remedy of last resort. These requirements seem, prima facie, clear and unambiguous, but, have been the subject of knitpicky debate and critical and evolving interpretation, which have sent GAAR into a tailspin of uncertainty. That notwithstanding, the author reminds the reader that while adequate terminological interpretation is vital, it is far beyond the scope of this work, and is still inconclusive at best. Plainly read, the conditions-precedent of GAAR are that there be:
(1) a tax benefit resulting from a transaction or part of a series of transactions (s.245(1) and (2), ITA);
(2) avoidance transaction/s, meaning that said transaction/s cannot have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit; and
(3) a misuse or abuse, meaning that it cannot be reasonably concluded that said tax benefit deriving from said avoidance transaction/s would be consistent with the, spirit or object or purpose of the provision/s in the Act that the taxpayer relies upon.

Since the latter “misuse” or “abuse” provision (in subsection 254(4)) is the most important limitation on the application of the GAAR, it begs further consideration. It is designed to ensure that the rule will be applied only in those cases where a transaction offends or runs contrary to the intention or purpose (or object or spirit) of the provisions at issue. The Supreme Court further qualified this by proposing on several occasions that a textual, contextual and purposive approach to statutory interpretation was required for the purposes of determining the object, spirit or purpose of the provisions at issue. Importantly, the Supreme Court has placed emphasis on the object and spirit of the provision itself—without implicitly or explicitly presuming that economic substance must necessarily be inherent to the object, or spirit or purpose of every provision of the Act:
“In all cases where the applicability of s. 245(4) is at issue, the central question is, having regard to the text, context and purpose of the provisions on which the taxpayer relies, whether the transaction frustrates or defeats the object, spirit or purpose of those provisions.”

[1] There is now Supreme Court precedent that suggests that courts should not seek to give effect to an unexpressed parliamentary intention or purpose to restrict a clear and unambiguous provision. See 65302 British Columbia Limited v. The Queen, 99 DTC 5799 [SCC].

[1]  See OSFC Holdings Ltd. v. The Queen, 2001 DTC 5471 (F.C.A.), where the tax benefit does not necessarily have to be enjoyed by the party entering into the avoidance transaction.

[1] See Canada Trustco, at para. 66.

[1] Canada Trustco at paragraph 49.

It should be noted that in cases where GAAR was not at issue when interpreting the application of provisions in the Act, the Supreme Court has qualifyingly acknowledged the importance of, transactional economic substance.
The Supreme Court’s textual/provisional emphasis on a “misuse or abuse” should be juxtaposed with the economic emphasis of the Department of Finance, whose Explanatory Notes state that:
“[S]ubsection 245(4) recognizes that the provisions of the Act are intended to apply to transactions with real economic substance, not to transactions intended to exploit, misuse or frustrate the Act to avoid tax”. [italics added]
Further, the Court provided some general examples as to when the analysis will lead to a finding of abuse, or not:
“This analysis will lead to a finding of abusive tax avoidance when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent. As well, abusive tax avoidance will occur when a transaction defeats the underlying rationale of the provisions that are relied upon. An abuse may also result from an arrangement that circumvents the application of certain provisions, such as specific anti-avoidance rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions. By contrast, abuse is not established where it is reasonable to conclude that an avoidance transaction under s. 245(3) was within the object, spirit or purpose of the provisions that confer the tax benefit.”

[1] See The Explanatory Notes to Legislation Relating to income Tax, [“Explanatory Notes”], issued by the Honorable Michael H. Wilson, Minister of Finance (June 1988) at 464-465. Keep in mind, however that the Explanatory Notes state at the outset that they “are intended for information purposes and should not be construed as an official interpretation of the provisions they describe”.

[1] Canada Trustco at paragraph 45.

IV. Burdens and Boundaries
It seems clear that the court places the burden on the taxpayer to refute the existence of either a tax benefit or a/n avoidance transaction/s (which are understood to be questions of fact), and on the Minister to establish a misuse or an abuse (which is understood to be a question of law, and essentially the most important requirement).
As Canadian taxpayers shop beyond Canada’s borders for favorable tax jurisdictions to plan their affairs, Canada’s GAAR accompanies them with extra-territorial might. Foreign tax practitioners would be well-advised to inform their Canadian clientele that it is now well established that GAAR can, “potentially” , apply to treaties and that, whether successful or not, the CRA may try to even argue that treaty shopping, itself, is contrary to GAAR.
Not only, then, is the inception and evolution of Canada’s GAAR a 360-degree tautology, but so is the relevance of our national views of ethical tax avoidance relative to those of our tax treaty partners. There is an unrelenting effort by the CRA to construe treaties–otherwise silent on avoidance issues–as containing inherent anti-abuse rules, despite legal principles or tax court rulings to the contrary. Uncertainty may be a necessary trade-off for the prevention of abusive avoidance, whatever that means. But what is unnecessary is that Canada become a haven for uncertainty in the process.