Is there a Place for “Abuse of the Act Read as a Whole” in the GAAR Analysis

I.            OVERVIEW

The general anti-avoidance rule (the “GAAR”) in section 245 of the Income Tax Act (the “Act”) is essentially an interpretive rule. It mandates a textual, contextual, and purposive (“TCP”) analysis of tax provisions to scrutinize avoidance transactions. In Canada Trustco,¹ the leading GAAR case, the Supreme Court adopted a single, unified approach to the misuse or abuse analysis, which rejected “abuse of the Act read as a whole” as a separate test.² In the recent GAAR Consultation paper,³ the Finance expressed concern over the unified approach and considered codifying the “scheme” approach in Copthorne⁴ to give more weight to “abuse of the Act read as whole.”

In Canada Trustco, the Supreme Court summarized the conditions for the GAAR to apply:

1. a “tax benefit,”
2. an “avoidance transaction,” and
3. a “misuse” of the specific provisions of the Act relied upon to obtain the tax benefit or an “abuse” of the provisions of the Act read as a whole.

Under the GAAR, avoidance transactions are subject to an enhanced scrutiny. The misuse or abuse analysis includes a TCP analysis of tax provisions to determine their purpose. Avoidance transactions must comply with the purpose of the provisions and are otherwise abusive despite strict compliance with the text of the provisions. In fact, the GAAR has imposed on the court “the unusual duty” of going behind the words of the legislation to determine its purpose, even when the words are clear.⁵ It is Parliament’s response to the pre-GAAR jurisprudence, which emphasized the primacy of textual interpretation and rejected judicially fashioned anti-avoidance tests such as the business purpose test.⁶