In the June 2023 tax letter, recent rule changes that increased the risks of undertaking “aggressive tax planning” were discussed.
In Dean’s Knight Income Corp. v. Canada, 2023 SCC 16, the Supreme Court of Canada landed a further blow against such planning. The court found that the tax plan undertaken in the case was subject to the General Anti‑Avoidance Rule (GAAR).
In Dean’s Knight, the plan fell just short of triggering a provision in the Income Tax Act (in this case, an acquisition of legal control of a corporation), to the benefit of the corporation.
However, the Supreme Court found that the corporation had achieved the “functional equivalent” of an acquisition of control through a separate agreement. By doing so, the Court found that the Act had been abused, and the GAAR was applied to deny the tax benefit.
This case demonstrates the Court’s willingness to apply the GAAR to deny tax benefits where the Act is abused.
As discussed in the June 2023 tax letter, there are proposals to soon amend the GAAR in order to make it easier to apply against taxpayers and to introduce penalties where it is found to apply. At present, the only negative impact of a GAAR finding is the denial of the tax benefit, and the imposition of interest on tax due.
Given these proposed changes, and the Supreme Court’s recent decision, the GAAR is a hot topic for discussion with your professional advisor prior to undertaking any tax planning.