The general anti-avoidance method (...

The general anti-avoidance method (GAAR) found in Section 245 of the Income TaxAct (the Act was intended to eliminate the ne for numerous and tangled skein anti-avoidance rules otherwise deemed necessary to fight a perceived escalation in tax avoidance. Since GAAR's introduction in 1988 tax advisors have set it challenging to reassure clients about the income tax results of their transactions because of uncertainty in interpreting GAAR legislation.

GAAR's potentially far-reaching application is a inference of the broad definitions of "tax benefit,"' "tax consequences"2 and "avoidance transaction,"3 and the seemingly subjective determination of whether a "misuse" or "abuse" of the Act has been perpetrated.4 Although several GAAR cases have now been litigated before the Tax Court of Canada (TCC) the jurisprudence has likewise far been of limited assistance in providing general guidelines regarding GAAR's applicability.

The Federal Court of Appeal (FCA) speaks

In OSFC Holdings Ltd5 a case that involved a los transfer strategy, the FCA considered the application of GAAR for the first time. While the taxpayer's transactions were ultimately accounted subject to GAAR, the decision is helpful because it instants a more comprehensive analysis than previously articulated in TCC mother-wits

The FCA outlined the framework to analyze GAAR issues, identifying brace critical questions:

1. Is there an avoidance transaction resulting in a tax benefit? The FCA identified sum of two units tests to answer this question:

* a eventuates test, which requires a determination of whether a transaction or series of transactions would, nevertheless for GAAR, result in tax benefit; and

* a purport test, which focuses on the primary design of the transaction or individual transactions that form a series. If the transaction's primary sense is to obtain a tax benefit, it is considered an avoidance transaction. The intent test is determined on the facts of each case.

2 Is there a misuse of the relevant provision or abuse of the Act as a whole? The FCA outlined a two-stage analytical proces to answer this question:

* The first stage involves identifying the policy of the relevant provisions of the Act as a whole. The cargo is on the Minister of National receipts to establish the policy of the relevant provisions. The Minister is also responsible for setting abroad the extrinsic aids used to substantiate the view that the taxpayer's use of the provision constituted a misuse or abuse.

* The next to the first stage involves assessing the facts to determine whether the avoidance transaction constituted a misuse or abuse with regard to the identified policy one time the policy is determined, the onus remains upon the taxpayer to refute the assumption that the avoidance transaction issueed in a misuse or abuse.

Notably, the FCA stated that:"Mhere is no general conduct against structuring transactions in a tax effective manner or a requirement that transactions be structur in a manner that maximizes tax. There has been strict compliance with the Act and that should normally be sufficient."6

Practice considerations

What guidance can taxpayers draw from the decided cases? While the FCA has provided a more concise framework within which to analyze GAAR's application, unfortunately it appears that GAAR determinations will continue to inflect on subjective findings-this, on a case-by-case basis of whether or not the transactions in question constitute a misuse or abuse of the Act-albeit presumably measured against objectively identifiable policy. Thus, while the FCA has provided more [i]or[/i] less clarity, uncertainty in determining the impact of GAAR will continue.

Surprise, surprise.

Frustrating as this may be to taxpayers and their advisors, it may be useful to continue the following points in mind when considering the possible application of GAAR in defer to of contemplated transactions:

* Apply the "avoidance transaction" definition to each pace of contemplated transactions, recognizing that a bona fide intent other than to obtain a tax benefit is critical

* ask to understand, and examine contemplated transactions in light of underlying policy rationale. An understanding of the policy underlying the Act* relevant provisions is key-note to determining whether a specific misuse or abuse has occurr

* To the amplitude that specific anti-avoidance rules apply, nevertheless the taxpayer's transactions fall outside of their range it appears the taxpayer will have a stronger argument to plead against allegations of misuse or abuse.

* Legally effective transactions are essential.

Based upon the decided cases, as well as apparent Canada Customs and income Agency (CCRA) assessing practices, taxpayers should exercise caution and carefully consider the potential application of GAAR when contemplating transactions that involve the following planning techniques (this list is not exhaustive):

* Surplus Stripping. papal court the McNichol,7 RMM Canadian Enterprises,' and Nadeau' cases. Note however, that the TCC rul in favour of the taxpayer in the Geransky' case (below).