What’s new? The latest evolution in the GAAR “modernization” proposals

Published by Molly Martin

I.              INTRODUCTION

The Department of Finance first publicly announced an intention to modify the general anti-avoidance rule (the “GAAR”), found in section 245 of the Income Tax Act (Canada) (the “Act”), on November 30, 2020. This intention most recently came to fruition with the release of legislative proposals on August 4, 2023 (the “August Proposals”) and the introduction of Bill C-59 in Parliament on November 30, 2023.

This blog outlines the key similarities and differences between the August Proposals and the GAAR changes contained in Bill C-59.


Bill C-59 does not substantially alter the following portions of the August Proposals:

  • the addition of a preamble in subsection 245(0.1);
  • the expanded scope of “avoidance transaction” in subsection 245(3);
  • the conditional three-year extension of the normal reassessment period in subparagraph 152(4)(b)(viii);
  • the ability to voluntarily disclose transactions in accordance with subsections 237.3(12.1) and (12.2); and
  • the due diligence defence in subsection 245(5.2).


The August Proposals added a preamble in subsection 245(0.1). That subsection would state that, inter alia, the GAAR: (a) applies to deny the tax benefit of avoidance transactions that result in a misuse or abuse of provisions of the Act; and (b) strikes a balance between: (i) the Canadian government’s responsibility to protect the tax base and the fairness of the system; and (ii) taxpayers’ need for certainty.

The preamble remains substantially unchanged in Bill C-59.

“Avoidance transaction”

The August Proposals expand the scope of an “avoidance transaction” in subsection 245(3) such that a transaction which results in a tax benefit, either directly or indirectly, will be an avoidance transaction unless obtaining the tax benefit “is not one of the main purposes for undertaking or arranging” the transaction.

This expanded definition of an “avoidance transaction” remains substantially unchanged in Bill C-59.

Deterrence measures

The August Proposals sought to incorporate deterrence measures into the GAAR by prima facie imposing:

(a) a penalty equal to 25% of the additional tax owing as a result of the application of the GAAR, minus any gross negligence penalty imposed in respect of the same transaction or series (pursuant to subsection 245(5.1)); and

(b) a three-year extension of the normal reassessment period for assessments made as a consequence of the application of the GAAR (pursuant to subparagraph 152(4)(b)(viii)).

These deterrence measures may be avoided by voluntarily disclosing transactions in accordance with subsections 237.3(12.1) and (12.2). Additionally, a form of due diligence defence is available under subsection 245(5.2) if it was reasonable to conclude, based on an identical or almost identical transaction published or contemplated by the courts or a relevant government authority, that the GAAR would not apply.

The deterrence measures, and provisions permitting taxpayers to avoid them, remain substantially unchanged in Bill C-59 (other than in relation to the penalty calculation, as discussed below).


The main substantive changes from the August Proposals to Bill C-59 relate to the economic substance test (in subsections 245(4.1) and (4.2)) and the calculation and coming into force of penalties (in subsection 245(5.1)).

Economic substance test

The August Proposals, through subsection 245(4.1), sought to add an explicit economic substance test into the GAAR analysis and impose a rebuttable presumption of misuse or abuse for transactions “significantly lacking in economic substance”. Through subsection 245(4.2), the August Proposals then provided a list of non-exhaustive factors that point to a lack of economic substance. These factors include, inter alia:

(a) no substantial change in the opportunity for gain and no risk of loss for the taxpayer and non-arm’s length persons (including because of certain enumerated sub-factors);

(b) the expected value of the tax benefit exceeds the expected value of the non-tax economic return; and

(c) the entire, or almost entire, purpose for undertaking or arranging the transaction was to obtain a tax benefit.

Bill C-59 continues to incorporate an explicit economic substance test. However, it abandons the rebuttable presumption and, instead, amends the proposed language for subsection 245(4.1) to state that “significantly lacking economic substance” is only an “important consideration that tends to indicate” there has been a misuse or abuse.

Bill C-59 also adds an exception to the non-arm’s length factor in paragraph 245(4.2)(a) by excluding otherwise non-arm’s length taxpayers if they can reasonably be considered to have economic interests largely adverse from those of the taxpayer. The explanatory notes provide examples of transactions between adult siblings, parents and adult children, and separating spouses.


Bill C-59 seeks to impose a penalty that is slightly higher than that in the August Proposals. In particular, Bill C-59 includes in subsection 245(5.1) the value of tax credits that are reduced by application of the GAAR. Thus, the penalty would be 25% of the total value of both the additional tax payable and reduced tax credits if the GAAR is successfully applied. The reduction for any gross negligence penalties separately imposed remains unchanged in Bill C-59.

Further, Bill C-59 provides that the penalty provisions will only apply to transactions occurring on or after the later of January 1, 2024 and the day on which Bill C-59 receives royal assent.


The latest iteration of the GAAR proposals underscores the need for taxpayers and their advisors to be proactive in structuring transactions. The breadth of the economic substance test and the imposition of automatic penalties should not be taken lightly. Bill C-59 largely carries through the content of the August Proposals, and the level of diligence required in tax planning matters thus remains high.