CRA publishes webpage with examples of allegedly GAAR-able transactions

On December 20, 2024, the CRA published its views on the general anti-avoidance rule (GAAR) in a new webpage. The webpage contains some general comments by the CRA regarding the GAAR, examples of when the CRA would apply the GAAR, and remarks on when the CRA might impose penalties on a taxpayer who has engaged in a transaction to which the GAAR applies.

This tax alert provides a brief overview of the GAAR examples from the new webpage. It is important to note that the examples are not intended to be an exhaustive list of circumstances in which the CRA will apply the GAAR. In addition, the CRA’s views are not legally binding and the Tax Court may well disagree with the CRA regarding the application of the GAAR in a particular scenario.

Surplus stripping

The first category of examples given by  the CRA are “surplus stripping” transactions. The “targeted abuse” under that category are transactions which benefit an individual or non-resident shareholder in a manner that, in the CRA’s view, either reduces the Canadian tax base or results in a return of capital exceeding the shareholder’s after-tax investment. According to the CRA, the GAAR applies to transactions undertaken to “strip corporate surplus” that defeats the object, spirit, and purpose of sections 84, 84.1, 212.1, and subsection 89(1) of the Income Tax Act (Canada) (the “ITA”).

The CRA provided three surplus stripping examples. All three appear to have been drawn from cases previously decided by the Tax Court against the taxpayer.

Creation of an artificial capital loss

The CRA also identified a “value shift” transaction to which it would seek to apply the GAAR. Value shift transactions, according to the CRA, result in an “artificial capital loss”, which the CRA defines as  “a loss that does not reflect a true decline in value of a capital asset or where there was no change in the taxpayer’s overall economic power”. In the CRA’s view, these transactions result in a misuse or abuse of sections 38, 39, and 40 of the ITA.

Discretionary trusts and the application of the 21-year deemed disposition rule

Finally, the CRA reiterated that it may apply the GAAR to transactions that result in the avoidance of the 21-year rule by discretionary family trusts. In the CRA’s view, the examples provided circumvent the application of subsection 104(5.8) of the ITA, which is a specific anti-avoidance rule designed to capture trust-to-trust transfers that involve dispositions of property that are not at fair market value. The CRA has been on record for several years that it would seek to apply the GAAR to the scenarios described in the examples.

Prepared by: Patrick R. Murray

Patrick attended the Peter A. Allard School of Law at the University of British Columbia, where he completed the Master of Laws in Taxation program while earning his National Committee on Accreditation certificate. Patrick is also a JD graduate from… more »

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