CRA Gives Guidance on GAAR Rulings

Since 1988, 1,125 files have been referred to the GAAR Committee, according to recent statistics from CRA; CRA presented this and other statistics as it went through the GAAR process at the CRA & Professionals Breakfast Seminar in Toronto on June 6. 

Resulting litigation in 52 of those files ended in a 50-50 split: the Crown and the taxpayer have each won 26 cases.

Since the Supreme Court’s decision Canada Trustco Mortage Co. v. The Queen (2005 SCC 54), the Crown has been successful in 18 cases, and the taxpayer has been successful in 13 cases. The CRA attributes this to its better understanding of the interpretation and application of the GAAR. 

The GAAR Committee recommended that the GAAR be applied in 865 files of the 1,125 referred files, citing GAAR as the primary basis of assessment in 378 files, and a secondary basis of assessment in 487 files. 75 percent of the cases that have been litigated focused on whether there was misuse or abuse of the Act (or another statute).

At the Toronto Centre Breakfast Seminar on June 6, the process through which the General Anti-Avoidance Rule (“GAAR”) in section 245 of the Income Tax Act may be applied in the course of an audit was discussed. The presentation was made by the Manager of Income Tax Rulings Directorate, Yves Moreno, and Suzanne Saydeh, Manager of the GAAR and Technical Support Section at the Aggressive Tax Planning Division of the International and Large Business Directorate and member of the CRA’s GAAR Committee. A summary of their comments follows.

The Typical Process Under the GAAR

The process is usually commenced by an auditor in a local Tax Services Office that identifies a transaction (or series of transactions) to which the GAAR may apply.

The auditor collects the relevant facts and a proposal letter is drafted that provides a detailed analysis of the potential GAAR application. The taxpayer is invited to provide a response to this letter. The whole file, including the taxpayer’s response letter and any included documents is then sent to the Aggressive Tax Planning Division of the CRA.

The Aggressive Tax Planning Division seeks to ensure the consistent application of the GAAR. It performs an independent analysis based on the initial referral information, but strives to make any changes it deems necessary and not merely to “rubber stamp” the applications.

The Aggressive Tax Planning Division scrutinizes certain applications and transactions very closely, including applications for clearance certificates, rollover transactions, or foreign reporting information. This information is also related to other similarly situated taxpayers who may have conducted similar transactions and therefore assists with flagging other potential GAAR violations.

GAAR Committee

Although the Aggressive Tax Planning Division ultimately determines whether the matter should be referred to the GAAR Committee, other divisions of the CRA are also consulted during the decision making process. If a file is referred to the GAAR Committee and there is a “new issue”, the Aggressive Tax Planning Division will draft a referral. If no “new issues” arise, the Aggressive Tax Planning Division will provide a recommendation to the GAAR Committee.

Referrals to the GAAR committee include:

a) the auditor’s views

b) the taxpayer’s representations, and;

c) the Aggressive Tax Planning Division’s views.

Members from the CRA, the Department of Finance, and the Department of Justice all participate in the GAAR Committee, which meets periodically to consider the referrals. The GAAR Committee then provides a recommendation on the application of the GAAR in the particular case at issue.