General anti-avoidance rule

Legislative history

The general anti-avoidance rule (“GAAR”) was enacted as part of the 1988 tax reform. The consolidated record discloses four subsequent amendments:

• S.C. 2005, c. 19, s. 52. The definition of “tax benefit” was extended to reductions, avoidance, or deferral of tax that would be payable “but for a tax treaty”, and to refunds increased as a result of a tax treaty. Subsection 245(4) was replaced. The former text provided, “for greater certainty”, that subsection (2) did not apply unless there was a misuse or abuse; the new text provides that subsection (2) applies “only if” there is a misuse of the provisions of the Act, the Income Tax Regulations, the Income Tax Application Rules, a tax treaty, or another relevant enactment, or an abuse having regard to those provisions read as a whole. Subsection 245(5) was amended to apply “notwithstanding any other enactment” and to reach exemptions and exclusions as well as deductions. A companion provision, section 4.1 of the Income Tax Conventions Interpretation Act (S.C. 2005, c. 19, s. 60), applies section 245 to any benefit provided under a tax convention, for transactions entered into after 12 September 1988.
• S.C. 2010, c. 25, s. 68. Amendment consolidated from 15 December 2010. Changes to be described
• S.C. 2022, c. 19, s. 56. The definitions of “tax benefit” and “tax consequences” were set out in paragraphs. Paragraph (c) was added to “tax benefit”, and the words “or could at a subsequent time be” were added to paragraph (c) of “tax consequences”, so that a tax attribute not yet used falls within the rule. Subsections (2) to (8) were not changed.
• S.C. 2024, c. 15, s. 66 (Bill C-59, royal assent 20 June 2024). The most significant revision since enactment: a preamble in subsection 245(0.1); a “one of the main purposes” threshold for an avoidance transaction in subsection 245(3); an economic substance rule in subsections 245(4.1) and (4.2); and a penalty in subsections 245(5.1) to (5.3). According to the Department of Finance, these amendments apply to transactions that occur on or after 1 January 2024, except the preamble, which came into force on royal assent.

Before 2024, subsection 245(3) excluded a transaction that “may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit”. That wording still governs transactions completed before 2024, and can be read under “Historic text” above. Application and coming-into-force rules are not part of the consolidation and must be read in the amending Acts.

Interpretation and application →

Interpretation and application

The application of subsection 245(2) turns on three questions, each of which must be answered in the affirmative: whether there is a tax benefit arising from a transaction or series of transactions; whether the transaction giving rise to the benefit is an avoidance transaction; and whether the avoidance transaction is abusive within the meaning of subsection 245(4) (Canada Trustco, paras. 17 and 66). The taxpayer bears the burden of refuting the first two; the Minister bears the burden of establishing the third (para. 66; see paras. 63–65).

Tax benefit

See the annotation under the definition of “tax benefit” in subsection 245(1). Since 2022, a benefit includes the creation or preservation of a tax attribute that has not yet been used.

Avoidance transaction

For transactions on or after 1 January 2024, subsection 245(3) makes a transaction an avoidance transaction unless it may reasonably be considered that obtaining the tax benefit was not one of the main purposes for undertaking or arranging it. The inquiry is objective: the court assesses the relative importance of the driving forces behind the transaction on the whole of the evidence (Canada Trustco, paras. 28–29). Under the former “primarily for bona fide purposes” test, a single tax-motivated step within a commercially driven series could still be an avoidance transaction; the “one of the main purposes” wording widens that reach.

Misuse or abuse

The Minister must show that the avoidance transaction results in a misuse or abuse under subsection 245(4). The analysis proceeds in two stages. The court first identifies the object, spirit, and purpose of the provisions relied on, through a unified textual, contextual, and purposive interpretation, and then asks whether the transaction falls within or frustrates that purpose (Copthorne, paras. 69–72). Abuse must be clearly demonstrated (para. 72). In Deans Knight, the majority described the object, spirit, and purpose as the rationale of the provision (para. 57), a concise description of that rationale (para. 60), which may relate to the basis for providing relief, the conduct Parliament sought to encourage, or the result or mischief it sought to prevent (para. 61). The full framework is at paras. 56–73.

For transactions on or after 1 January 2024, subsection 245(4.1) provides that a significant lack of economic substance is “an important consideration that tends to indicate” misuse or abuse. Subsection 245(4.2) lists indicative factors: an economic position that is unchanged (including by circular flows of funds, offsetting positions, timing, or accommodation parties); an expected tax benefit that exceeds the expected non-tax return; and a purpose that is entirely or almost entirely to obtain the tax benefit. The Department of Finance’s explanatory notes record that an earlier draft framed this rule as a rebuttable presumption, and that the enacted wording was changed so that subsection 245(4.1) would not be read as merely shifting the onus to the taxpayer.

Consequences

Where the rule applies, the tax consequences are determined “as is reasonable in the circumstances” to deny the benefit (subsection 245(2)), including by the measures listed in subsection 245(5): allowing or disallowing deductions, exemptions, or exclusions, allocating amounts to any person, recharacterizing payments, and ignoring the tax effects of other provisions. Those consequences may be determined only by an assessment, reassessment, additional assessment, or determination under subsection 152(1.11) (subsection 245(7)). Other persons may request consequential adjustments within 180 days after the notice is sent (subsections 245(6) and (8)).

← Legislative historyPolicy purpose and commentary →

Policy purpose and commentary

The Department of Finance described the object of the rule, in the Supplementary Information Relating to Tax Reform Measures tabled on 16 December 1987, as being “to block sophisticated strategies designed to yield tax advantages that were not intended by Parliament”. The quotation is reproduced in the Department’s November 2023 explanatory notes on the preamble.

Subsection 245(0.1) now states that the rule is meant to deny the tax benefit of transactions that misuse or abuse the Act “while not preventing taxpayers from obtaining tax benefits contemplated by Parliament”, and that it strikes a balance between protection of the tax base and taxpayers’ need for certainty. The explanatory notes state that the preamble is intended to inform the application of the rule without forming part of its analytic framework. In describing what Parliament is taken to contemplate, the notes draw on the description of a provision’s rationale in Deans Knight (headnote; see para. 61).

The 2024 amendments followed the Department’s 2022 consultation paper, Modernizing and Strengthening the General Anti-Avoidance Rule, which addressed mixed-purpose transactions and the purpose test, proposed an explicit economic substance rule, and considered a penalty based on a fixed percentage of the tax benefit.

Scholarly and professional commentary to be added

← Interpretation and applicationRelevant case law →

Relevant case law

• Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601. The three-part framework (paras. 17 and 66); the burden on the taxpayer to refute a tax benefit and an avoidance transaction, and on the Minister to establish abuse (para. 66); the objective purpose inquiry (paras. 28–29). GAAR held not to apply to a sale-leaseback generating capital cost allowance (paras. 76–81).
• Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721. GAAR applied to a sale of shares that permitted a horizontal rather than a vertical amalgamation, preserving paid-up capital that subsection 87(3) would otherwise have cancelled (para. 127). Guidance on tax benefit by comparison with an alternative arrangement (para. 35), on “series of transactions” and subsection 248(10) (paras. 39–58), and on the two-stage abuse analysis (paras. 69–72).
• Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, [2021] 3 S.C.R. 590. The majority held that the Minister had not established that reliance on the treaty exemption by a conduit resident in Luxembourg abused the Canada–Luxembourg tax convention; GAAR’s application to treaty shopping.
• Deans Knight Income Corp. v. Canada, 2023 SCC 16. GAAR applied to transactions that avoided an acquisition of control while transferring the benefit of losses; the transactions frustrated the rationale of subsection 111(5) (para. 140). The “rationale” approach to the abuse analysis (paras. 56–73).

Decisions of the Supreme Court are available on the Court’s website and on CanLII. Tax Court and Federal Court of Appeal decisions applying the amended rule will be added as they are released.

← Policy purpose and commentaryCRA documents →

CRA documents

• IC88-2, General Anti-Avoidance Rule – Section 245 of the Income Tax Act (21 October 1988), with IC88-2S1 (13 July 1990). These circulars predate every amendment described above and should be read in that light.
• General anti-avoidance rule (GAAR), CRA compliance page. The CRA chairs an interdepartmental GAAR Committee that includes the Departments of Finance and Justice and, unless the Committee has already reviewed a similar issue or transaction, consults it before relying on GAAR as a primary or alternative assessing position. The page also describes the penalty and lists CRA documents 2024-1008251I7, 2024-1016011E5, and 2023-0987941I7.
• Mandatory disclosure rules – Guidance, paras. 15–19, on the interaction of the disclosure rules with the GAAR penalty and the extended reassessment period, and the optional filing under subsection 237.3(12.1).

← Relevant case lawRegulations, forms, and elections →

Regulations, forms, and elections

• Form RC312, Reportable Transaction and Notifiable Transaction Information Return. Disclosure under section 237.3 or 237.4 on this form takes the transaction outside the penalty in subsection 245(5.1) and the extended reassessment period in subparagraph 152(4)(b)(viii). The form is also used for the optional filing under subsection 237.3(12.1).
• No regulations are made under section 245.

← CRA documentsCompliance →

Compliance

• Penalty. Where subsection 245(2) applies to a transaction that was not disclosed under section 237.3 or 237.4, subsection 245(5.1) imposes a penalty equal to 25% of the resulting increase in tax (and reduction in amounts deemed paid on account of tax), less any gross negligence penalty under subsection 163(2) for the same transaction. Subsection 245(5.2) excuses the penalty only where it was reasonable to conclude that GAAR would not apply because the transaction was identical or almost identical to one addressed in published administrative guidance or in court decisions.
• Reassessment period. Subparagraph 152(4)(b)(viii) extends the reassessment period by three years for a reassessment made to give effect to section 245, unless the transaction was disclosed under section 237.3 or 237.4.
• Optional disclosure. Under subsection 237.3(12.1), a taxpayer whose transaction is not otherwise reportable may file the information return by the filing-due date for the taxation year in which the transaction occurs. Under subsection 237.3(12.2), the return may be filed up to one year late; the extension of the reassessment period is then one year instead of three, and the return is treated as filed on time for the penalty.
• Determinations. The Minister may issue a notice of determination under subsection 152(1.11) where section 245 affects amounts not yet reflected in tax payable, such as loss balances. By subsection 152(1.2), the objection and appeal provisions apply to the determination.

← Regulations, forms, and electionsPlanning and dispute notes →

Planning and dispute notes

Planning

• Record the non-tax purposes of each step when the plan is made, not afterwards. Under the “one of the main purposes” test, each transaction in a series is examined, and the evidence of purpose is assessed objectively.
• For each provision relied on, identify its rationale in the terms used in Deans Knight and explain why the plan is consistent with it. Address the economic substance factors in subsection 245(4.2) expressly: the change in the taxpayer’s economic position, the expected non-tax return, and the purpose.
• Consider an optional disclosure on Form RC312 under subsection 237.3(12.1). A timely filing removes the transaction from the penalty and from the three-year extension of the reassessment period; a filing up to one year late still avoids the penalty but leaves a one-year extension (subsection 237.3(12.2)). The cost is that the transaction is brought to the CRA’s attention.
• Where the plan follows published CRA guidance or decided cases, keep copies of the documents relied on as they stood when the transaction was entered into. The penalty exception in subsection 245(5.2) turns on reasonable reliance on a transaction that was identical or almost identical.

Disputes

• Establish which version of section 245 governs each transaction. The “one of the main purposes” test, the economic substance rule, and the penalty apply to transactions on or after 1 January 2024; earlier transactions are governed by the former text.
• The burden is divided: the taxpayer must refute the tax benefit and the avoidance transaction, and the Minister must establish abuse (Canada Trustco, para. 66), which must be clearly demonstrated (Copthorne, para. 72). The Minister’s statement of the object, spirit, and purpose of each provision relied on is central to the dispute and should be identified early.
• GAAR operates only through an assessment, reassessment, additional assessment, or determination (subsection 245(7)). A notice of determination under subsection 152(1.11) is open to objection and appeal (subsection 152(1.2)), as is the penalty (subsection 245(5.3)).
• Check the reassessment period. A reassessment that gives effect to section 245 may be made up to three years after the normal period unless the transaction was disclosed, and one year after it where a late optional disclosure was filed.
• Where GAAR is applied to one party, other persons affected by the same transaction may request consequential adjustments within 180 days after the notice is sent (subsection 245(6)).

← ComplianceProvincial and treaty parallels →

Provincial and treaty parallels

• Ontario. The Taxation Act, 2007, S.O. 2007, c. 11, Sch. A, contains its own general anti-avoidance rule in section 110, with a preamble in subsection 110(0.1), economic substance rules in subsections 110(4.1) and (4.2), and a penalty in subsections 110(5.1) and (5.2). The former definition of “avoidance transaction” continues to apply to transactions before 1 January 2024 (subsection 110(11)). Section 110.1 applies section 237.3 of the federal Act (reportable transactions) for Ontario purposes, and section 110.2 applies section 237.4 (notifiable transactions).
• Quebec. The Taxation Act, CQLR c. I-3, contains a separate general anti-avoidance rule in sections 1079.10 to 1079.13, with definitions in section 1079.9, a penalty in section 1079.13.1 equal to 50% of the tax benefit denied (not applicable where a disclosure return was filed), and an extended reassessment period in section 1079.15.1. Preventive disclosure is made under sections 1079.8.7 and 1079.8.7.1.
• Tax treaties. Section 4.1 of the Income Tax Conventions Interpretation Act provides that section 245 applies to any benefit provided under a tax convention, notwithstanding the convention. The principal purpose test in Article 7(1) of the Multilateral Instrument, given effect in Canada by the Multilateral Instrument in Respect of Tax Conventions Act, S.C. 2019, c. 12, operates alongside section 245 for the treaties it covers (see Alta Energy).

← Planning and dispute notesAnnotated cross-references →

Annotated cross-references

• Sections 237.3 (reportable transactions) and 237.4 (notifiable transactions) adopt the subsection 245(1) meanings of “tax benefit” and “transaction”, and govern the disclosure that avoids the penalty; subsections 237.3(12.1) and (12.2) provide for optional disclosure.
• Subsections 152(1.11), (1.111), and (1.2) (determinations) and subparagraph 152(4)(b)(viii) (extended reassessment period).
• Subsection 163(2) (gross negligence penalty), which reduces the section 245 penalty.
• Subsection 248(10) (series of transactions).
• Specific anti-avoidance rules that the courts consider as part of the scheme of the Act in the abuse analysis, for example subsections 55(2), 84.1(1), and 111(5).

← Provincial and treaty parallelsSources →

Sources

• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 245 and prior versions: Justice Laws Website.
• Department of Finance Canada, Explanatory Notes Relating to the Income Tax Act and the Income Tax Regulations (November 2023), clause 66 (section 245).
• Department of Finance Canada, Modernizing and Strengthening the General Anti-Avoidance Rule (2022, archived).
• Supreme Court of Canada: Canada Trustco, Copthorne, Alta Energy, Deans Knight.
• Ontario e-Laws, Taxation Act, 2007; LégisQuébec, Taxation Act.

← Annotated cross-references