Fairness and economic substance: Select comments on the proposed changes to the General Anti-Avoidance Rule

May 11, 2023 | Regan A. O’Neil

Canada’s 2023 federal budget was released on March 28, 2023 and contained proposals for changes to the general anti-avoidance rule (“GAAR”). We published a summary overview of the proposed changes to the GAAR on March 28. This article provides some additional comments on two aspects of the proposed changes to the GAAR; the addition of a preamble and an economic substance test. This article assumes the reader has at least a general understanding of the GAAR.

The proposed amendments to the GAAR, if enacted, could significantly erode some common tax-planning approaches. Tax planning which seeks to obtain tax benefits unintended by Parliament will be limited and perhaps eliminated by the proposed amendments to the GAAR. The proposed amendments also appear to further weaken and perhaps eliminate the principle articulated in the often cited case of the Duke of Westminster[1] and commonly referred to as the Duke of Westminster principle, which in summary terms states that a taxpayer is entitled to order their affairs to minimize their tax payable[2] and is also a rejection of “the substance” doctrine, as referred to in The Duke.

The proposed preamble refers to allowing taxpayers to obtain tax benefits contemplated by the relevant provisions, balancing the need for certainty with protecting the tax base and the fairness of the tax system. As referred to in the Consultation Paper, “Modernizing and Strengthening the General Anti-Avoidance Rule”[3], the fairness concept seems to be based, at least in part, on “the sense of injustice and inequality felt by those who do not benefit from tax avoidance” and “the unfair shifting of the tax avoider’s burden on other taxpayers.”[4] Reasonable people can disagree on what is “fair.” It will be interesting to see how the Courts deal with the fairness aspect of the preamble in light of the Supreme Court of Canada stating in the decision of Canada Trustco[5]  that formulating tax policy is not the role of the Courts. The use of the word “fairness” in the proposed preamble is either very close to the policy-making chalk-line, if not over it. A stated intention of the GAAR is not to affect legitimate tax planning. With the proposed changes to the GAAR, the Department of Finance is providing some clarity on what it considers legitimate tax planning, being the tax benefits contemplated by the relevant provisions.

The proposed amendments to the GAAR also add an economic substance test to the misuse or abuse stage of the GAAR analysis. Where a transaction lacks economic substance, it will tend to indicate a misuse or abuse of the Income Tax Act (the “Act”). However, and as a noted in the Tax Measures: Supplementary Information, Budget 2023 (“Tax Measures Supplement”)[6], a transaction that lacks economic substance will not necessarily be a misuse or abuse of the Act. The example given in the Tax Measures Supplement was a contribution to a tax-free savings account (“TFSA”). The only purpose of a contribution to a TFSA is to obtain a tax benefit but because the tax benefit being sought is intended by Parliament, it is not considered a misuse or abuse of the Act. The proposed preamble is seemingly applicable to this conclusion.

Generally stated, factors indicating a particular transaction lacks economic substance include:

    1. there being no change or substantially no change in the opportunity for profit or risk of loss for the taxpayer (considering all taxpayer’s that are non-arm’s length to the taxpayer), including because of
        1. a circular flow of funds;
        2. offsetting financial positions; or
        3. the timing between steps in the series;
    2. when the transaction was entered into, the tax benefit exceeded the non-tax economic benefit; and
    3. where it is reasonable to conclude that the entire or almost entire purpose of the transaction or series is to obtain a tax benefit.

In Canada Trustco, the Supreme Court of Canada wrote: “Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe.”[7] Canada Trustco also rejected the proposition that the GAAR contained a business purpose test such that transactions which lack a business purpose are invalid. The Canada Trustco decision did say that economic substance may be relevant at various stages of a GAAR analysis but a lack of economic substance does not mean a transaction is abusive tax avoidance. The proposed economic substance test does not equate a lack of economic substance with abusive tax avoidance. Instead, the proposed economic substance test provides that a lack of economic substance tends to indicate a misuse or abuse of the Act. Clearly, the Department of Finance wants to elevate the importance and role that a lack of economic substance plays in the misuse or abuse part of the GAAR analysis.

When going beyond obtaining tax benefits contemplated by the relevant provision of the Tax Act, tax planning will become riskier if the proposed amendments to the GAAR are implemented. Furthermore, query whether any CRA administrative positions will be affected by the new GAAR rules, for example post-mortem pipeline planning. Subject to certain conditions, the CRA administratively permits post-mortem pipelines to address the double taxation that can otherwise result on the death of an individual. By using the provisions of the Act to implement a post-mortem pipeline so as to avoid double taxation, is a taxpayer obtaining benefits contemplated by the relevant provisions? Such transactions lack economic substance, their entire purpose is to obtain a tax benefit, but perhaps they are saved when fairness is considered. This is a simple example intended to demonstrate the type of consideration necessary for future tax planning should the proposed changes to the GAAR be implemented.

For further information regarding the GAAR proposals please contact a member of Miller Thomson’s Corporate Tax group.


[1] Inland Revenue Comrs v Duke of Westminster, [1935] UKHL 4, [1936] AC 1 (The Duke).

[2] The complete quote from The Duke is as follows: Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.

[3] Department of Finance, August 11, 2022 at: https://www.canada.ca/en/department-finance/programs/consultations/2022/general-anti-avoidance-rule-consultation/modernizing-strengthening-general-anti-avoidance-rule.html (Consultation Paper).

[4] Consultation Paper citing David A. Dodge, “A New and More Coherent Approach to Tax Avoidance”, (1988), 36:1, Canadian Tax Journal, p. 1-22 at p. 4.

[5] Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 (Canada Trustco).

[6] Department of Finance, Budget 2023, Tax Measures: Supplementary Information.

[7] Canada Trustco at para. 11.

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