GAAR me maties Part I

This post is not dedicated to pirates, but rather s. 245 of the Income Tax Act.

As of 2010, the federal Income Tax Act alone amounts to 2,847 pages and is one of the worst books every written. There are also the federal Income Tax Regulations and they amount to 1,339 pages. Taxation in Canada is now a very complex system and few Canadians seem to understand it.

Taxes have changed a great deal over time, yet the last time we had a comprehensive review of our tax system was in 1962 with the Carter Commission. Since then, our system has experienced haphazard changes with no framework or unifying theme to them. Our current system is a mish-mash of deductions, exemptions, credits, transfers, and rates with no unifying objective or premise. In fact, our system is now so complex that there are major legal and accounting sectors established not only to understand the system, but also to develop tax minimization strategies.

To circumvent these tax minimization strategies, section 245 was incorporated into the Income Tax Act (ITA) in 1988. Section 245 is the General Anti-Avoidance Rule (GAAR) which allows CRA to challenge abuses under the ITA. In essence, GAAR legislates that where a transaction or a series of transactions achieves a reduction, avoidance or deferral of tax, and those transactions or series of transactions are not conducted for any primary purpose other than to obtain a tax benefit, the tax consequences of the transaction or series of transactions may be invalidated. In other words, GAAR prohibits tax avoidance behaviour that, while complying with the rules as written, violates the spirit of the rules. GAAR turns tax avoidance activities into tax evasion activities.

The complexity of the tax system and the need for GAAR has led many tax experts, including myself, to call for a fundamental review and overhaul of our tax system. I’ll write more about GAAR in my next post.