GST Memoranda

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G500-6-9 General Anti-Avoidance Rule (GST 500-6-9)

GST 500-6-9

Ottawa, June 7, 1991
ADMINISTRATION AND ENFORCEMENT
SPECIAL COMPLIANCE MEASURES
GENERAL ANTI-AVOIDANCE RULE

This memorandum in the SPECIAL COMPLIANCE MEASURES sub-series explains the application of the general anti-avoidance rule (GAAR) in respect of the Goods and Services Tax (GST).

LEGISLATIVE REFERENCES

Excise Tax Act - sections 68.2, 123, 274, subsections 298(1), 298(2), Part VIII, Division IX of Part IX.

DEFINITIONS

The following definitions have either been taken from the Excise Tax Act, as amended by S.C. 1990, c.45 (Bill C-62), or represent departmental interpretations of terms relevant to the administration of that Act.

"Act" means the Excise Tax Act;

"amount" means money, property or a service, expressed in terms of the amount of money or the value in terms of money of the property or service;

"assessment" means an assessment under Part IX of the Excise Tax Act and includes a reassessment under Part IX of the Excise Tax Act;

"exempt supply" means a supply included in Schedule V to the Excise Tax Act;

"input tax credit" means a credit claimable by a registrant for the Goods and Services Tax paid or payable by the registrant in respect of the acquisition or importation of any property or service for consumption, use or supply in the course of commercial activities of the registrant;

"Minister" means the Minister of National Revenue;

"person" means an individual, partnership, corporation, trust or estate, or a body that is a society, union, club, association, commission or other organization of any kind;

"registrant" means a person who is registered under section 241 or who is required to apply to be registered under section 240 of the Excise Tax Act;

"supply" means, subject to sections 133 and 134 of the Excise Tax Act, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;

"tax" means the Goods and Services Tax payable under Part IX of the Excise Tax Act;

"taxable supply" means a supply that is made in the course of a commercial activity, but does not include an exempt supply;

"transaction" includes an arrangement or event.

GENERAL ANTI-AVOIDANCE RULE

1. The general anti-avoidance rule (GAAR) under section 274 of the Excise Tax Act is intended to prevent persons from benefitting from transactions undertaken primarily for the purpose of avoiding, reducing or deferring the payment of tax, or increasing a refund or rebate or other amount, where no other anti-avoidance provision is applicable. Such a transaction is considered to be "an avoidance transaction" and includes an arrangement or an event. The GAAR applies to all persons, e.g., registrants, persons claiming rebates, etc.

2. Where an avoidance transaction is undertaken, subsection 274(2) of the Act provides that the tax consequences will be determined as is reasonable in the circumstances in order to deny the tax benefit that, but for the GAAR, would have resulted from that transaction or from a series of transactions which include that transaction.

3. A "tax benefit" is defined to mean a reduction, avoidance or deferral of tax or other amount payable, or an increase in a refund or rebate of tax or other amount under section 68.2, Part VIII or Part IX of the Act. Included within the "other amounts" of a tax benefit are interest, penalties and other amounts which are neither tax, refunds or rebates.

4. "Tax consequences" to a person is defined to mean the amount of tax, net tax, input tax credit, rebate or other amount payable by, or refundable to the person under section 68.2, Part VIII or Part IX of the Act, or any other amount that is relevant to the purposes of computing that amount.

5. The following criteria will be taken into account when determining whether the GAAR will apply to a particular transaction:

(a) a tax benefit must result from a single transaction or a series of transactions of which the particular transaction is a part;

(b) the tax benefit will be considered to have resulted from an avoidance transaction unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than for the purposes of obtaining the tax benefit;

(c) the transaction results directly or indirectly in a misuse of the provisions of section 68.2, Parts VIII and IX of the Act or an abuse of those provisions when read as a whole.

These three criteria are discussed in more detail in the following paragraphs.

AVOIDANCE TRANSACTIONS

6. Pursuant to subsection 274(3) of the Act, an avoidance transaction is a single transaction, or a transaction that is part of a series of transactions, that, were it not for section 274 of the Act, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

7. A transaction that is undertaken or arranged for its resulting tax benefits may be considered to be an avoidance transaction even if it forms part of a series of transactions that are undertaken for bona fide purposes other than obtaining a tax benefit.

8. Tax planning or transactions that are carried out for purposes other than obtaining tax benefits but which minimize the payment of tax, as compared to other transactions which achieve the same purpose but which would result in higher tax liability, may not be considered to be avoidance transactions. Therefore, the GAAR will not apply to these transactions.

9. It is the purpose of the transaction as opposed to the effect which is of prime significance in determining if an avoidance transaction occurred. For example, some transactions may have business, investment or family effects and may nevertheless be avoidance transactions because the primary purpose of the transaction is to obtain a tax benefit.

10. The intent of a particular transaction will be determined from the stated intent of the person or persons involved, as well as the circumstances surrounding the transaction. If it can be ascertained from the circumstances of a transaction that it was, directly or indirectly, arranged primarily for tax benefit, the GAAR in subsection 274(2) will apply.

Misuse or Abuse of the Act

11. A reference to "the Act" in paragraphs 12, 13, 14 and 15 of this memorandum is a reference specifically to section 68.2 and Parts VIII and IX of the Act.

12. The GAAR does not apply in respect of a transaction where it may reasonably be considered that the transaction would not result, directly or indirectly, in a misuse of the provisions of the Act or in an abuse of the Act as a whole.

13. If a transaction is such that it is a misuse or abuse of the relevant provisions of the Act then the GAAR would apply.

14. Where the tax consequence of a transaction is dependent upon an interpretation of specific provisions of the Act and this dependence is such that the overall intent of the provisions or the Act is not met, then the transaction is considered to be a misuse or abuse of the Act. Transactions that rely upon the strict wording of a provision to gain a tax benefit where none was intended and, therefore, defeat the purpose of the provision, would also be a misuse or abuse of the legislation.

15. The GAAR will override other provisions of the Act in order to maintain the spirit and intent of the legislation.

TAX CONSEQUENCES

16. Pursuant to subsection 274(7) of the Act, where the GAAR applies, the determination of the tax consequences to a person shall only be made through a notice of assessment, reassessment or additional assessment.

17. Where the GAAR applies, pursuant to subsection 274(5), the following actions, while not an exhaustive list, may be taken in determining the tax consequences that are reasonable in the circumstances in order to deny the tax benefits to that person resulting from an avoidance transaction:

(a) any input tax credit or other deduction, or part thereof, in computing tax or net tax payable of that person may be allowed or disallowed, in whole or in part;

(b) any such credit or deduction or part thereof may be allocated to another person;

(c) the nature of any payment or other amount may be recharacterized;

(d) the tax effects to that person that would otherwise result from the application of other relevant provisions of the Act may be ignored; and

(e) any other tax consequences considered reasonable by the Minister may be applied.

18. Pursuant to subsection 274(6) of the Act, where a notice of assessment, reassessment or additional assessment has been sent to a person regarding a particular avoidance transaction to which subsection 274(2) may apply, then any other person may request an assessment, reassessment or additional assessment under that subsection regarding the same avoidance transaction.

19. The request for an assessment, reassessment or additional assessment by a person, other than the person to whom a notice of assessment, reassessment or additional assessment regarding an avoidance transaction was sent, must be made to the Minister in writing within one hundred and eighty days after the date of mailing of the notice.

20. Pursuant to subsection 274(8) of the Act, upon receipt of a request the Minister shall assess, reassess or make an additional assessment with respect to the person to the extent that the assessment, reassessment or additional assessment relates to an avoidance transaction of another person. The four year time limit normally applicable to assessments under subsections 298(1) and 298(2) of the Act will not apply in cases where the Minister makes the assessment, reassessment or additional assessment under subsection 274(8).

APPLICATION

21. The GAAR applies to any tax avoidance transaction. This will include all relevant transactions that relate to the transition period and are subject to the provisions of Part VIII and Division IX (Transitional) of Part IX of the Act.

22. The Minister of Finance tabled a Notice of Ways and Means Motion on December 18, 1990, that incorporates by reference the Department of Finance Press Release of the same date, wherein the Government gave notice of its intent to amend section 274 of the Act. It is proposed that section 274 will apply to transactions carried out between December 17, 1990 and January 1, 1991 to which section 68.2 of the Act applies. Section 68.2 provides for the recovery of the Federal Sales Tax (FST) on FST-paid goods which are sold to a person who would otherwise be entitled to acquire these goods on an FST-exempt basis.

NOTE: This memorandum is not a legal document. It contains general information and is provided for convenience and guidance in applying the Excise Tax Act and Regulations. If interpretation problems occur, please refer to the legislation or contact the nearest Revenue Canada Excise office.

REFERENCES
OFFICE OF RESPONSIBILITY:

Policy and Legislation

LEGISLATIVE REFERENCES:

Excise Tax Act

HEADQUARTERS FILE:

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SUPERSEDES GST MEMORANDUM:

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OTHER REFERENCES:

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SERVICES PROVIDED BY THE DEPARTMENT ARE AVAILABLE IN BOTH OFFICIAL LANGUAGES.

THIS MEMORANDUM IS ISSUED BY TECHNICAL INFORMATION, EXCISE BRANCH UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE, CUSTOMS AND EXCISE.