Tax Avoidance & Tax Planning – General Anti-Avoidance Rule

As a Canadian taxpayer, you need to be aware of the GAAR. Introduced in 1988, this rule allows the tax authorities to target and deal with people who are abusing or avoiding the Canadian taxation system. While many businesses focus on tax planning in order to save money, they may just find themselves being caught up by the CRA for tax avoidance. The CRA is always hunting businesses that are conducting their income tax planning in a manner that they incorporate tax avoidance transactions.

The Canadian Income Tax Act has set aside specific anti-avoidance rules which individuals and businesses must follow to the letter. The General Anti-Avoidance Rule is often used by the CRA whenever they can’t find a specific provision to address a transaction that a business or individual has carried out in order to evade tax.

Understanding the General Anti-Avoidance Rule (“GAAR”)

According to the Income Tax Act, the GAAR allows the Canada Revenue Authority to impose serious tax consequences to deny tax benefits to anyone found guilty of directly or indirectly making an avoidance transaction. There are other transactions that the CRA also considers under the GAAR. The revenue authority will, therefore, scrutinize any transactions they suspect to be done to avoid paying taxes when performing an audit. This is why you need to be aware of all transactions that apply under GAAR and avoid getting yourself in trouble when an audit is done.

What is done during an audit?

>When the CRA perform an audit, there are 3 important considerations which they use to analyze avoidance transactions.1. First, the CRA will determine if the transaction resulted in a tax benefit.

2. Secondly, if the transaction resulted in a tax benefit, they will scrutinize it to determine if it was an avoidance transaction.

3. Thirdly, it will be determined if the avoidance transaction that resulted in a tax benefit was abusive.

Abusive tax avoidance transactions are taken very seriously by the CRA. A tax avoidance transaction is considered abusive if it is found to defeat or frustrate the object, spirit or purpose of a specific provision in the Income Tax Act. Abusive tax avoidance is said to occur if the transaction is not in line with the object, spirit or purpose of the relevant income tax act.

When this is determined, the taxpayer is required to prove that first, a tax benefit did not arise from the transaction and that the transaction was not an avoidance transaction. If there is any uncertainty whether there was abuse, the taxpayer is the one given the benefit of the doubt.

It is very important to receive tax planning advice early on because you can avoid being assessed or reassessed by the CRA under GAAR. Taxpayers should take the necessary precautions before engaging in any tax planning transactions. If you are facing a GAAR assessment or need a tax planning consultant to help you avoid this, get in touch with an expert today.