On November 30, 2020, the Government of Canada released its Fall Economic Statement 2020. The Statement is titled “Supporting Canadians and Fighting COVID-19” and part of Chapter 4 addresses “modernizing anti-avoidance rules”.
In one short paragraph, the Government of Canada expresses concerns about any complex tax structure “that does not serve an economic purpose, including by shifting profits offshore and creating artificial tax deductions”. As a response, the Government proposes to update the General Anti-Avoidance Rule to make it more robust.
Since “economic purpose” is specifically mentioned, it is to be wondered whether under consideration may be codification of an economic substance doctrine in subsection 245(4). Subsection 245(4) limits the application of section 245 to avoidance transactions that are abusive of the Income Tax Act. The Explanatory Notes published when the GAAR was created (Department of Finance, June 1988) 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 frustrate the Act.[1] However, in Canada Trustco (2005 SCC 54), the Supreme Court of Canada rejected lack of economic substance as a stand-alone indication of abuse (para 58). Instead, the relevance of this notion according to that Court will depend on whether the particular provision conferring the tax benefit refers to a certain economic or other non-tax purpose (para 58).
Several scholars have expressed disappointment on this aspect of Canada Trustco decision and have been calling for an economic substance doctrine. Professor Brian J. Arnold states that “economic realities must be relevant under subsection 245(4) if the GAAR is to be effective in preventing abusive tax avoidance”,[2] and “[w]ithout consideration of the economic substance of a transaction, the GAAR will be ineffective”.[3] Similarly, Professor Jinyan Li argues that “[e]conomic substance analysis offers the best standard for drawing the line between legitimate tax planning and abusive tax avoidance”.[4]
Does the Government intend to endorse the scholars’ calling for economic substance doctrine and override Canada Trustco decision on this aspect? We will find out when the Government launches consultations in the coming months.
- Julia Zhuo (LLM Candidate, Osgoode Hall Law School)
[1] Canada, Department of Finance, Explanatory Notes to Legislation Relating to Income Tax (Ottawa: Department of Finance, June 1988), clause 186.
[2] Brian J. Arnold, "The Long, Slow, Steady Demise of the General Anti-Avoidance Rule" (2004) 52:2 Canadian Tax Journal 488-511, at 507.
[3] Brian J. Arnold, “Policy Forum: Confusion Worse Confounded - The Supreme Court’s GAAR Decisions” (2006) 54:1 Canadian Tax Journal 167-209, at 192.
[4] Jinyan Li, “‘Economic Substance’: Drawing the Line Between Legitimate Tax Minimization and Abusive Tax Avoidance” (2006) 54:1 Canadian Tax Journal 23-56, at 56.
Great post Julia! In my view, no to an "economic substance doctrine". There is a degree of certainty that you get with legal substance that you can't get with economic substance - particularly where taxpayers are looking for legal advice/opinions. However, there is a role for the factual "economic realities" of a particular transaction (different from economic substance - which I view a "re-characterization" concept). The recent SCC decision in MacDonald suggests this - as does the SCC decision in Shell - "economic realities" are relevant in interpreting ambiguous legislative provisions/concepts (and anti-avoidance rules tend to use ambiguous language). The problem is that the Courts appear to analyze the GAAR differently from other statutory provisions. The SCC decision in Loblaw Financial may provide additional guidance....... I have suggested elsewhere that the GAAR should be repealed and reliance had to "modernized" specific anti-avoidance rules.