CRA Loses GAAR Case

Tax planning is not inherently abusive; and taxpayers are entitled to organize their affairs in a way that will minimize their taxes, including family income splitting.

This was the finding of a judge in a recent case in which the Canada Revenue Agency (CRA) lost on its position under the General Anti-Avoidance Rule (GAAR) in the Tax Court of Canada. Taxpayers and their advisors will take comfort from the reasons written.

To be caught by the GAAR at Section 245 of the Income Tax Act (the Act), the taxpayer(s) must have achieved a “tax benefit” through an “avoidance transaction” that constitutes “abusive tax avoidance”. The first two criteria were conceded by the taxpayers in this case, therefore the crux of the case focused on the notion of “abusive tax avoidance” and what does and does not constitute.

The Court found in  (Brianne Gwartz v. The Queen (2013) TCC 86), that, for the purposes of subsection 245.4, aside from the two important issues described above, that the GAAR couldn’t be used to fill in “legislative gaps” where the transactions do not otherwise conflict with the object, spirit, and purpose of the Act.   

Arguably of even greater importance to taxpayers, at paragraph 52 the Court stated that there is no broad policy in the Act that forbids income splitting between families. In fact, the Court noted that marginal tax rates and the decision of the government to tax the individual as the basic taxable unit creates legislative incentives for taxpayers to split their income among family members.

The TCC ultimately allowed the taxpayers’ appeal because the object, spirit, and purpose of the impugned provisions of the Act were not violated. In coming to this conclusion, the Court referenced the 1999 Budget and the Notices of Ways and Means and Motions to evince the reasons behind the provisions in question.

Source: http://decision.tcc-cci.gc.ca/en/2013/2013tcc86/2013tcc86.pdf