New Developments in Canada’s General Anti-Avoidance Rule
Is Canada overreaching with proposed changes?

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Editor’s note. This article was written in early May. In Deans Knight Income Corporation v. The King, on May 26 the Supreme Court of Canada reached a seven-to-one decision in favor of the government.

The past twelve months have seen two very significant developments in the general anti-avoidance rule (GAAR) in Section 245 of Canada’s Income Tax Act (ITA). The first is the hearing by the Supreme Court of Canada (SCC) of the taxpayer’s appeal in Deans Knight Income Corporation v. The King,1 a GAAR case in which the Canada Revenue Agency (CRA) successfully applied GAAR to overturn a loss utilization plan the taxpayer had implemented. The significance of this case goes well beyond the particular provisions at hand (which are themselves quite important) to address questions about how GAAR should be analyzed and applied.

The second development is the government’s release of a discussion paper2 in August 2022 suggesting various possible legislative amendments to Section 245 of the ITA to expand its application, followed in March 2023 by the release of proposed amendments to Section 2453 and an invitation to comment on them. These legislative amendments, which are designed to make it significantly easier for the government to apply GAAR to challenge tax planning it considers objectionable, are likely to throw into question thirty-five years of jurisprudence on this most powerful of provisions in the statute.

What Is GAAR?

The Canadian government enacted GAAR in 1988 to respond to what it perceived as unacceptable levels of abusive tax planning that the ITA’s specific anti-avoidance rules had not sufficiently addressed. Accompanying the 1988 enactment of GAAR, the government released technical notes describing GAAR as follows:

New section 245 of the Act is a general anti-avoidance rule which is intended to prevent abusive tax avoidance transactions or arrangements but at the same time is not intended to interfere with legitimate commercial and family transactions. Consequently, the new rule seeks to distinguish between legitimate tax planning and abusive tax avoidance and to establish a reasonable balance between the protection of the tax base and the need for certainty for taxpayers in planning their affairs. . . . The new rule applies as a provision of last resort after the application of the other provisions of the Act, including specific anti-avoidance measures.

The first SCC decision on GAAR in 2005 established a number of key interpretive principles that still largely govern how the courts interpret and apply GAAR. In that case (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54), the SCC unanimously stated:

The approach to [Section] 245 of the Income Tax Act may be summarized as follows.

Three requirements must be established to permit application of the GAAR:

  1. A tax benefit resulting from a transaction or part of a series of transactions ([Section] 245(1) and (2));
  2. That the transaction is an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit; and
  3. That there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.

The burden is on the taxpayer to refute (1) and (2), and on the Minister to establish (3).

If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer.

The courts proceed by conducting a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at a purposive interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context of the whole Act.

Whether the transactions were motivated by any economic, commercial, family or other non-tax purpose may form part of the factual context that the courts may consider in the analysis of abusive tax avoidance allegations under [Section] 245(4). However, any finding in this respect would form only one part of the underlying facts of a case, and would be insufficient by itself to establish abusive tax avoidance. The central issue is the proper interpretation of the relevant provisions in light of their context and purpose.

Abusive tax avoidance may be found where the relationships and transactions as expressed in the relevant documentation lack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit, or where they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions.

Where the Tax Court judge has proceeded on a proper construction of the provisions of the Income Tax Act and on findings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error.

Unlike in typical cases, in those that invoke GAAR the objective is to look beyond the text of the relevant provisions toward their context and purpose, not merely to interpret the text (as is typical) but rather, as the Court stated in a subsequent case, to find “the rationale that underlies the words that may not be captured by the bare meaning of the words themselves.”4

Where GAAR applies to a transaction or a series of transactions, the CRA is empowered to redetermine the tax consequences of the relevant transactions as is reasonable under the circumstances in order to deny the tax benefit. GAAR thus constitutes a unique exception to the normal rule that “tax consequences flow from the legal relationships or transactions established by taxpayers,”5 that is, taking as a given whatever commercial law legal rights and obligations have been created.

The Deans Knight Case

The Deans Knight case involved a series of transactions designed to monetize a corporation’s losses without triggering an acquisition of control (AOC) of the corporation and the various loss restrictions in the ITA that an AOC creates.6 For purposes of these rules, the accepted AOC definition is de jure control, that is, the ability to elect a majority of a corporation’s directors, as opposed to the de facto control definition used in various other ITA provisions. After incurring significant losses from a failed business, Deans Knight became a wholly owned subsidiary of a new widely held and publicly traded corporation, New Forbes. New Forbes and Deans Knight entered into an agreement with Matco, a third party, under which Matco would arrange a corporate opportunity for Deans Knight for new funds to be raised in an initial public offering, which would not trigger an AOC under Section 111(5) of the ITA so long as there was no controlling shareholder. Matco arranged a $100 million IPO of Deans Knight under which the money raised was used to earn income from corporate debt securities sheltered from tax using Deans Knight’s accumulated tax losses.7

The CRA acknowledged that no AOC had occurred (even taking into account various supporting anti-avoidance rules), but applied GAAR on the basis that the taxpayer’s deal with Matco, in coming close to the line but not crossing it sufficiently, “locked up” Deans Knight so as to frustrate the object, spirit, and purpose of Section 111(5) of the ITA. The taxpayer prevailed before the Tax Court of Canada but lost in the Federal Court of Appeal, which held that the object, spirit, and purpose of these provisions is “to restrict the use of specified losses, including noncapital losses, if a person or group of persons has acquired actual control over the corporation’s actions, whether by way of de jure control or otherwise.”8

The SCC heard the appeal on November 2, 2022, and its judgment is still pending. Because the concept of “control” appears in various provisions throughout the ITA, the impact of this decision will extend well beyond the AOC rules (which are significant in their own right). Most important, however, will be the way in which the Court approaches a GAAR analysis generally, and in particular the guidance offered for conducting an analysis of object, spirit, and purpose. Among the conceptual issues of greatest interest that the Court may address are:

  • whether or not the object, spirit, and purpose that the CRA must establish to meet the standard of showing “clear” abuse by the taxpayer must themselves be “clear and unambiguous”;
  • what the role of CRA administrative practice is in a GAAR analysis (the CRA was unable to reconcile its position with the fact that it had given a number of positive advance tax rulings on a similar public company loss monetization); and
  • the impact of subsequent legislative amendments on determining object, spirit, and purpose (the government changed the statute after the taxpayer’s transactions to deem an AOC to occur in situations such as this, if shares representing a designated proportion of a corporation’s equity are acquired [irrespective of voting rights], but claimed this did not represent a change of Parliament’s legislative rationale).

This case is an example of the manner in which the CRA sometimes seeks to apply GAAR without articulating and evidencing clear and coherent object, spirit, and purpose that are logically consistent and demonstrably reflect Parliament’s legislative intent. Parliament did not intend for the CRA to determine object, spirit, and purpose on an “I can’t define it but I know it when I see it” basis, and the danger from such practice is that GAAR becomes a highly discretionary “smell test.”9 Deans Knight is potentially the most important SCC decision in many years.

The March 2023 Proposals

The release of the August 2022 discussion paper revealed how dramatically the government was considering moving the goalposts on GAAR. Among the proposals the Canadian government has floated for consideration are:

  • expanding the definition of “tax benefit”
  • lowering the threshold for what constitutes an “avoidance transaction”
  • adding government-friendly interpretive rules for establishing object, spirit, and purpose and determining whether misuse or abuse has occurred
  • requiring the courts to consider “economic substance” in making an abuse or misuse finding
  • suggesting that the government be relieved of its burden to show the taxpayer’s actions constitute abuse or misuse
  • adding a GAAR-specific penalty as a deterrent whenever GAAR is applied

These proposals encompass virtually every aspect of GAAR and in every respect favor the government. Crucially, what is missing is a clear articulation of which GAAR cases the government believes to have been wrongly decided, and hence why the government feels the problem lies in deficiencies in GAAR’s design. In its submission,10 the Canadian Chamber of Commerce observed that this sort of analysis of the GAAR case law would allow for a closer examination of what the perceived problem truly is and its causes, so as to better inform possible solutions.

Instead, the government chose to use the March 28, 2023, federal budget as an opportunity to announce specific proposed legislative amendments to GAAR. These March 2023 proposals consist of the following changes to GAAR:

  • adding a preamble containing certain CRA-friendly interpretative statements concerning GAAR
  • lowering the “avoidance transaction” threshold from a “primary purpose” test to a “one of the main purposes” test
  • deeming the absence of “economic substance” in a transaction as something that “tends to indicate that the transaction results in” misuse or abuse
  • adding a GAAR-specific penalty of twenty-five percent of the tax benefit sought (the penalty could be avoided by specifically disclosing the transaction to the CRA in prescribed form)
  • extending by three years the limitation period for the CRA to reassess under GAAR (again, unless specific disclosure in prescribed form is made to the CRA)

If enacted, the March 2023 proposals would dramatically change the most powerful provision in the ITA, resulting in GAAR being applied far more often than it already is. The practical effect of lowering the threshold for finding a transaction to be an “avoidance transaction” will be to virtually eliminate it as a barrier to applying GAAR, particularly where tax advice has been obtained (even in its current form it rarely impedes the CRA). Most important, the government’s refusal to indicate which previously decided cases it believes were wrongly decided and/or would have been decided differently had these amendments been in place badly undermines thirty-five years of guidance provided by existing GAAR jurisprudence. By proposing vaguely worded amendments to the GAAR provisions using feel-good, mean-anything terms such as “fairness,” “economic substance,” and “certainty” without specifying for the courts what these amendments are intended to change about the status quo, taxpayers, tax authorities, and courts are left to figure out for themselves what these changes mean, knowing that when arguing a case the government’s lawyers will insist that Parliament doesn’t amend the law for no reason and so must have meant something substantive when making these changes.

In its submission to the government on these proposed amendments,11 the Canadian Chamber of Commerce expressed the view that the government is drawing the wrong conclusion from the fact that the government wins only about half of the GAAR cases it litigates, despite having all the advantages in such controversies. A careful review of the GAAR jurisprudence indicates fairly clearly that when the government loses a GAAR case, the loss is due not to some deficiency in GAAR that taxpayers are exploiting to get away with abusive tax planning, but rather because 1) the government has not adequately articulated and evidenced what the CRA claims to be Parliament’s legislative rationale, and 2) the CRA is pushing the envelope by applying GAAR inappropriately.

For the most part, existing GAAR jurisprudence already deals with the subject matter of the March 2023 proposals correctly, such as making appropriate trade-offs between certainty and protecting the tax base and incorporating “economic substance” into determining object, spirit, and purpose and undertaking a misuse or abuse analysis where the relevant statutory provisions make it apposite to do so. This being the case, amendments to GAAR such as those contained in the March 2023 proposals will simply expand the scope of GAAR to a wide variety of benign tax planning that is not abusive while doing little or nothing to catch abusive transactions that are not already caught under existing law.

The government would be much better advised to focus its efforts on further articulating the object, spirit, and purpose of the ITA (starting with those areas that most frequently spark GAAR disputes, such as loss utilization and surplus stripping) and enhancing the practical administration of GAAR to ensure that efforts are concentrated on those cases whose results are clearly contrary to Parliament’s demonstrable legislative intent. A robust GAAR that prevents abusive tax avoidance without overreaching is an important element of Canada’s tax system. The government and the business community have a shared interest in applying GAAR to (and only to) those taxpayers who have clearly obtained abusive results and avoiding costly and time-consuming disputes in other cases that do not pose the same implications for the tax base.


Steve Suarez is a partner at Borden Ladner Gervais LLP in Toronto.


  1. Deans Knight Income Corporation v. His Majesty the King, Supreme Court of Canada, The author acted as counsel to the Canadian Chamber of Commerce, which participated in the case as an intervener.
  2. Department of Finance Canada, Modernizing and Strengthening the General Anti-Avoidance Rule, Consultation Paper, August 11, 2022,
  3. Department of Finance Canada, Tax Measures: Supplementary Information, 2023 Federal Budget, March 28, 2023,
  4. Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, at paragraph 70. The Court in Copthorne went on to specify, in paragraph 91, that “[t]he consideration of context involves an examination of other sections of the Act, as well as permissible extrinsic aids.”
  5. Jean Coutu Group PJC v. Canada, 2016 SCC 55, paragraph 41. In the same paragraph, the Court goes on to note “This tenet is closely related to the Duke of Westminster principle, which is that taxpayers have the right to order their affairs to minimize tax payable.”
  6. Essentially, pre-AOC capital losses or losses from property cannot be used post-AOC, whereas pre-AOC losses from a business can be used post-AOC only if the corporation continues to operate the business in which the losses were generated and only against income generated by the loss business or another business that is sufficiently similar to the loss business. For further discussion, see Steve Suarez, “Tax Planning With Losses in Canada,” Tax Notes International, August 1, 2005, p. 451; and Suarez, “Using Tax Losses Within a Canadian Group of Companies,” Tax Notes International, April 2, 2012, p. 59. See also Suarez, “Canadian Subsidiaries,” Business Tax Canada, 2023,
  7. For a more detailed discussion of the Deans Knight case, see Suarez, “Taxpayer Seeks Leave to Appeal Anti-Avoidance Case to Supreme Court of Canada,” Tax Notes International, September 27, 2021, p. 1713.
  8. Deans Knight Income Corp. v. Canada, 2021 FCA 160, rev’g 2019 TCC 76.
  9. For further discussion, see the Factum of the Canadian Chamber of Commerce at
  10. The Canadian Chamber of Commerce’s September 30, 2022, submission is available at
  11. The Canadian Chamber of Commerce’s submission in response to the March 2023 proposals is available at “Canadian Chamber Shares Post-Budget Comments on the General Anti-Avoidance Rule (GAAR),” Canadian Chamber of Commerce, May 4, 2023,

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