General anti-avoidance rule (GAAR)

Owners and advisers planning a reorganization before a sale may need to consider the GAAR. The CRA says the rule’s purpose is to deny tax benefits that comply with a literal reading of the provisions but not with the object, spirit or purpose of the legislation.

What section 245 asks

• Is there a tax benefit, such as a reduction, avoidance or deferral of tax?
• Is the transaction an avoidance transaction? Under subsection 245(3), a transaction that results in a tax benefit, alone or as part of a series, is one unless it may reasonably be considered that obtaining the benefit is not one of its main purposes
• Would it result in a misuse of the provisions, or an abuse having regard to those provisions read as a whole, as subsection 245(4) describes?

Subsection 245(4.1) treats a significant lack of economic substance as an important consideration that tends to indicate misuse or abuse. Subsection 245(5.1) adds a penalty where the rule applies to a transaction that was not disclosed under section 237.3 or 237.4, with an exception in subsection 245(5.2).

What to ask

Ask the adviser what non-tax purpose each step serves and whether disclosure applies. The CRA’s GAAR page says transactions that strip corporate surplus in a manner that defeats the object, spirit and purpose of sections 84 and 84.1, among other provisions, are subject to the GAAR. See whether the CRA can challenge a reorganization before a sale.