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1 GENERAL ANTI-AVOIDANCE RULE (GAAR) 1. Origin and Purpose of Provision 2. GAAR Provision 3. Reaction of Tax Community 4. Specific Legislative Directions 5. Limitations to Application of GAAR 6. Objection and Appeal 7. Effective Date of GAAR 8. GAAR Committee 9. Recent Supreme Court Guidelines 1. Origin and Purpose of Provision - ITA 245; IC 88-2; TN-22 The general anti-avoidance rule (GAAR) was enacted as part of the 1987 tax reform to combat the CRA’s losing battle against aggressive tax planning practices , or what Finance referred to as abusive tax avoidance. For many years the Agency successfully challenged these transactions as shams or artificial transactions, in spite of the fact that many of their attack strategies did not have statutory authority. However, several cases blunted the Agency’s efforts. In Stubart , 1 the taxpayer entered into agreements with an affiliate intended to transfer its business to the affiliate while allowing it to carry on the day-to-day operations as nominee of the affiliate. The admitted purpose of the arrangement was to allow the affiliate to offset tax losses. Once this objective had been achieved, the assets would be reconvened to the taxpayer. Several actions had been taken to properly implement the agreement of purchase and sale, but other matters were not attended to, such as the transfer of the necessary business licence. Nor were creditors, employees, and customers informed of the ownership change. The Federal Court of Appeal upheld the Trial Division’s finding that a valid transfer or sale of assets had not occurred, and that the income from the business reported by the affiliate should be added back to the original taxpayer’s income . The court strongly implied that its finding was influenced by the purpose for which the transaction was entered into, namely, tax avoidance. The Supreme Court reversed the judgments of the Federal Court of Appeal and the Federal Court — Trial Division, and in doing so established a series of guidelines stating that the formality with which transactions are accomplished may be of more importance in determining their fiscal effect. The court denied the necessity of an independent or bona fide business purpose in order to support the tax effect of transactions . Moreover, if the requirements of the provisions of the Act had been satisfied, then the tax consequences to the taxpayer should stand. The court further stated that this would not apply if the relevant transactions were ineffective or incomplete, or constituted a sham within the classical definition of this concept. When the Supreme Court rejected the business purpose test in Stubart , and 1 Stubart Investments Limited v. The Queen , [1984] C.T.C. 294, 84 D.T.C. 6305 (S.C.C.).
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2 Richardson 2 determined that the Agency could not conduct fishing expeditions to acquire tax audit information, the Agency concluded it did not possess sufficient ammunition to pursue future avoidance cases. A general rule was needed to attempt to
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This note was uploaded on 02/19/2012 for the course ACCT 4454 taught by Professor Barry during the Spring '12 term at Saint Mary's University Texas.

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