“GAAR” stands for The General Anti-Avoidance Rule and is governed by s. 245 of the Income Tax Act. GAAR applies to transactions that have occurred for the sole purpose of obtaining a tax benefit (known as an avoidance transaction).

s. 245(1) defines what is meant by tax benefittax consequences, and transaction, while s. 245(2) covers the rules of GAAR and states:

(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

S. 245(3) defines “avoidance transaction” as any transaction that results in a tax benefit unless it can be said that the transaction or transactions were made for another purpose which was not to avoid tax.

The SCC in Canada Trustco Mortgage Co. v. Canada established a three-part test to determine whether or not GAAR applies. If you meet this 3-part test, GAAR will apply:

  1. Did a tax benefit arise from the transaction or series of transactions?

  2. Is/Are the transaction(s) found to be avoidance transactions?

  3. Is the transaction(s) abusive in any way?

Simply, it is the Government’s “back-up plan” when the other sections of the ITA do not apply or have been used in a way that results in tax being avoided in accordance with the ITA rather than contrary to the ITA.

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