Courts mature in their approach to GAAR

September 28, 2020 | By Julius Melnitzer

The Federal Court of Appeal’s decision in Canada v. Bank of Montreal (BMO) may represent a third-generation evolution of general anti-avoidance rule (GAAR) caselaw.

“Initially, in cases like Canada v. Canadian Pacific Ltd., the courts were not really comfortable with the GAAR concept and uncertain how far it would extend,” says William Innes of Toronto, a veteran tax litigator.

William Innes

But then along came the Supreme Court of Canada’s sister decisions in Mathew v. Canada and Canada Trustco Mortgage Co. v. Canada.

“These were watershed judgments, the beginning of a new, uniform judicial approach,” Innes says. “It distinguished the application of GAAR in the business context and its application in a purely tax planning context.”

BMO, it seems, portends an even greater degree of comfort.

“Judges have become quite familiar with GAAR in the business context,” Innes says. “For example, they often take judicial notice that financial institutions operate in a very competitive environment with thin margins, and that what looks like anti-avoidance is simply an attempt to be competitive internationally.”

In BMO, the Canada Revenue Agency (CRA) argued that currency hedging by the bank, which it tied to $1.4 billion in loans to its U.S. subsidiaries, breached the anti-avoidance rules. Particularly upsetting to the CRA was the use of a shell company in the financing structure.

When the bank ultimately disposed of shares involved in the financing, it claimed CA$321 million in capital losses attributable to exchange rate fluctuations. CRA re-assessed, arguing that the loss arose from the sale of shares in the context of a tax-dodging scheme.

“This was a very technical case,” Innes says. “But the court had no trouble concluding that the Crown screwed it up by misapplying the rules.”

As the court saw it, the loss would have occurred even absent the complex financing structure. The upshot was that the CRA had not established the existence of a “tax benefit” for the purposes of GAAR. Absent such a benefit, GAAR could not have been contravened.

“Courts decide most GAAR cases on whether abuse or misuse occurred, because taxpayers frequently concede that a tax benefit arose,” says Steve Suarez, a tax partner in Borden Ladner Gervais LLP’s Toronto office. “But we never got that far here.”

What does emerge, however, is that the court regarded a contravention of GAAR finding as akin to an extraordinary remedy.

“The Crown has to show both that a tax benefit has been achieved and that there has been a clear contravention of established tax policy,” Suarez says. “GAAR doesn’t apply just because the government doesn’t like the result and might have written the law differently had it considered a particular set of facts.”


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Julius Melnitzer is a legal journalist, editor, writing coach and media trainer to law firms and legal departments.

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