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The Difference Between Avoidance and Abuse: When Does Corporate Tax Planning Cross the Line
The Federal Court of Appeal has recently provided much needed clarification on the parameters of the controversial General Anti-Avoidance Rule (the "GAAR"), which has left many corporate tax advisors breathing a temporary sigh of relief. The rule, contained in section 245 of the Income Tax Act, may be asserted against taxpayers who are in technical compliance of the law, but, in the opinion of the Canadian Revenue Agency (the "CRA"), have participated in a transaction that resulted in a "misuse" or "abuse" of the provisions of the Act.1. Taxand Canada details the facts.
Since its enactment in 1988, a great deal of uncertainty has entered into the realm of tax planning. More than two decades later, this uncertainty still abounds today. Taxpayers and tax planners alike are unable to predict with any degree of certainty whether or not they have structured their affairs in a way which will avoid CRA scrutiny, despite complying with the letter of the law. Contributing to this atmosphere of doubt is the Agency's tendency to use the GAAR as a tool to make retroactive determinations of the appropriateness of a transaction - a process which critics claim has more to do with the quantum of the assessment, and less to do with any well-founded principles of tax law.
In order for the GAAR to apply, the taxpayer must have enjoyed a tax benefit (i.e. a reduction, avoidance or deferral of income tax), have entered into an avoidance transaction (i.e. a transaction undertaken primarily for a tax benefit), and engaged in abusive tax avoidance (i.e. the tax benefit enjoyed as a result of the avoidance transaction frustrated or defeated a specific provision of the Income Tax Act).
In Lehigh Cement v. The Queen, the issue under appeal was whether or not Lehigh Cement Limited ("Lehigh"), a corporation resident in Canada, should be responsible for assessments made for unpaid non-resident withholding tax on interest paid in the years 1998 to 2002 to Bank Brussels Lambert (the "Belgium Bank"). Specifically, the court had to determine if the CRA's assessments were justified by the GAAR.
It would be a heavy burden to refute the accusation that the CRA was once again motivated into attacking the appropriateness of a transaction on the basis of the quantum involved. Lehigh is proof that even when one's affairs are structured in a manner that is consistent with the wording of the Income Tax Act, and complies with its provisions from both a legal and economic standpoint, the GAAR could still be asserted. One would hope that the CRA returns to pursuing taxpayers on the basis of well-founded principal-based claims, rather than ad hoc attempts to attack legitimate tax planning.
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