Tax Avoidance Rule in Canada Tested in Deans Knight Case
The Expert: Steve Suarez

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Question: What does the Supreme Court decision in Deans Knight mean for tax professionals?

The general anti-avoidance rule (GAAR) in Canada’s Income Tax Act applies when a taxpayer undertakes transactions whose primary purpose is to obtain a tax benefit, in a way that abuses or misuses one or more provisions of the Act. As noted in the last issue of Tax Executive, GAAR is the subject of both a recent Supreme Court of Canada case and proposed legislative amendments.1

On May 26, 2023, the Supreme Court of Canada denied the taxpayer’s appeal in Deans Knight Income Corp. v Canada, 2023 SCC 16, concluding in a seven-to-one judgment that GAAR did apply to the taxpayer.2 This case involved a series of transactions carefully designed to monetize a corporation’s accumulated business losses without triggering corporate loss restrictions applicable where an “acquisition of control” (AOC) of the corporation occurs. The court concluded that an investment agreement among the taxpayer, its shareholder, and a third-party facilitator (Matco) that arranged for a monetization of those losses for the benefit of new shareholders achieved the “functional equivalent” of a de jure AOC of the taxpayer while frustrating the intention of the legislation.3

Was Decision a Surprise?

Not really. In this case the taxpayer had undertaken a series of transactions designed to come very close to triggering the corporate loss restrictions without actually crossing the line. It was clear at the hearing that a number of justices were uncomfortable with the result achieved and viewed the taxpayer quite skeptically.

Were New Legal Principles Established? 

Again, not really, although some phrasing is new. Much of the majority’s judgment reiterated principles established in prior GAAR cases, in particular the importance of determining the object, spirit, and purpose (OSP) or legislative rationale of the relevant provisions of the Act through an examination of those provisions’ text, context, and purpose. What is somewhat different about this decision is 1) the stress the Court placed on “purpose” (rather than text and context) in determining OSP and 2) the “functional equivalence” concept as a benchmark for determining abuse, that is, whether the taxpayer achieved the “functional equivalent” of what the statute was aiming at.

What Does Case Tell Us About How Courts Will Approach GAAR?

The case certainly shows that courts will stretch to apply GAAR if they believe the taxpayer has achieved a result contrary to what they think Parliament intended. For taxpayers, it’s critical to be able to explain why whatever you’ve done is not inconsistent with Parliament’s intent (the majority and dissent differed significantly as to what Parliament intended). The case also maintains the trend that tax-driven transactions fare significantly worse under GAAR than do merely tax-efficient ones.

Positives Arising From Decision?

The Supreme Court overturned the lower court’s “actual control” test, which no one understood. Most important, the court rejected the government’s submission that the OSP of the corporate loss rules was based on shareholder continuity, rather than the de jure control threshold in those rules themselves. The fact that the court tethered its conclusion to the control test employed in the provisions themselves is extremely important, and leaves the Canada Revenue Agency without much new to work with going forward. The taxpayer lost, but in a way that has limited go-forward impact.

Biggest Takeaway for Tax Planning?

It has probably always been the case that a taxpayer who achieves the “functional equivalent” of what the Act aims to prevent is in serious GAAR danger. Going forward, taxpayers need to focus on this risk and articulate why what they’ve achieved isn’t the “functional equivalent” of what the statute has targeted or, failing that, why GAAR ought not to apply to the way in which they’ve achieved it. Taxpayers should understand that unless they can do this, they cannot count on being close to the line but not quite over it when defending a GAAR assessment.

Will GAAR Cases Be Litigated Differently?

Fundamentally, no. I do think we’ll see taxpayers spend more time establishing what they think the purpose of the relevant provisions is, since the court in Deans Knight spent so much time on that. Doing so may involve greater emphasis on extrinsic aids, such as government explanatory notes or Parliamentary proceedings. “Functional equivalence” will also need to be addressed explicitly. But ultimately litigating a GAAR case is still about explaining to a court why it should be comfortable with viewing what the taxpayer has done as being consistent with what Parliament intended when it drafted the relevant provisions.

How Does Case Affect GAAR Amendments Proposed in March 2023 Federal Budget?

This in fact may end up being the most important result of the case. Most of what the government proposed in these amendments appears to do exactly what the court in Deans Knight did in terms of interpreting GAAR, balancing the relevant considerations, and considering economic substance where appropriate. So what then are the purpose and effect of these amendments? As the Canadian Chamber of Commerce explained in detail in its comprehensive submission on these amendments,4 there is no apparent reason to amend GAAR to make it more effective: Deans Knight shows that the courts are willing to apply it in a flexible and robust way to prevent outcomes they perceive to be contrary to Parliament’s intentions. The government should either drop the proposed amendments (including the suggested new penalty) or clearly state that they merely codify existing jurisprudence. The last thing we need is changes to the statute that call into question the efficacy of existing case law.



  1. Steve Suarez, “New Developments in Canada’s General Anti-Avoidance Rule,” Tax Executive, July-August 2023,
  2. Deans Knight Income Corp. v. Canada, Supreme Court Judgments, Supreme Court of Canada, May 26, 2023,
  3. For a more detailed discussion of the facts of this case and the judgments, see Steve Suarez, Laurie Goldbach, and Elizabeth Egberts, “Deans Knight: The Case for Rethinking GAAR Amendments,” Borden Ladner Gervais, June 2, 2023,
  4. “Canadian Chamber Shares Post-Budget Comments on the General Anti-avoidance Rule (GAAR),” Canadian Chamber of Commerce, May 4, 2023,

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