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Tax News and Developments April 2023

In brief

On 28 March 2023, Canada’s Minister of Finance tabled budget materials that propose significant changes to Canada’s General Anti-Avoidance Rule (GAAR). These changes will create substantial uncertainty, increase companies’ tax risk, and add turbulence to the Canadian tax disputes landscape.  


  1. Key takeaways

Key takeaways

The three most important proposed changes to the GAAR are:

  • the incorporation of an economic substance analysis
  • the addition of a 25% penalty
  • an extension of the limitation period within which the CRA may apply the GAAR

Other noteworthy proposals include the addition of a new preamble to the GAAR, and an amendment to the purpose test that must be met in order for the GAAR to apply.

Economic substance as part of a GAAR analysis

Proposed amendments introducing an “economic substance” analysis are a meaningful departure from the Canadian norm, as Canadian courts have historically operated on the basis that transactions a taxpayer enters into are generally taxed based on their legal form. 

The key feature of the proposed economic substance amendment is that economic substance considerations are not introduced as a standalone test to deny benefits. They are added as an element to be considered when determining whether transactions are abusive.  

Under the proposed amendments, where transactions at issue are “significantly lacking in economic substance”, this lack of substance will tend to indicate abusive tax avoidance. The amendments include a non-exhaustive list of factors to be considered when deciding whether a transaction is significantly lacking in economic substance1.

The budget materials make it clear, however, that not all transactions lacking economic substance are abusive, saying “in cases where the tax results sought are consistent with the purpose of the provisions or scheme relied upon, abusive tax avoidance would not be found even in cases lacking economic substance”. 

The materials also clarify that this proposed amendment would not render all existing GAAR jurisprudence obsolete. They state that where a transaction does not lack economic substance, “the existing misuse or abuse jurisprudence would continue to be relevant”2.  

New 25% GAAR penalty

The budget materials also introduce a significant penalty where the GAAR applies and the transactions at issue had not been disclosed (either mandatorily or voluntarily) to the CRA3. The proposed penalty is 25% of the tax benefit.
Taxpayers should take this proposed penalty into account when choosing how aggressive they wish to be in future Canadian tax planning.

Extended limitation period for GAAR assessments

The budget also proposes to extend the limitation period within which the CRA may apply the GAAR. If the proposals pass, the limitation period for issuing a GAAR reassessment will be extended by an additional three years if the transaction was not disclosed to the CRA4. For many taxpayers, this would mean a reassessment under the proposed GAAR may be issued up to seven years after the original assessment (the same statutory limitation period as for reassessments under Canada’s transfer pricing rules).

Other noteworthy developments

Two other meaningful changes to the GAAR are also proposed.

The first is an introduction of a preamble speaking to the GAAR’s objectives. A proper read of this preamble will inevitably be the subject of extensive argument in courts and the subject of many future decisions.

The second is a modification to the applicable purpose test. The current GAAR focuses on the primary purposes of the transactions being scrutinized to determine if there is an “avoidance transaction”; the proposed GAAR would find an avoidance transaction where “one of the main purposes” was to obtain a tax benefit.

Next steps towards becoming law

The Department of Finance has invited comment on these provisions by 31 May 2023, after which it has indicated it is planning to publish revised legislative proposals and announce the application date of the amendments.

If the final legislation looks like the current proposals, significant uncertainty will be created for taxpayers seeking to comply with the law. Economic substance will become a legislated factor that Canadian taxpayers must consider when evaluating risk of the GAAR applying to transactions (along with a 25% penalty). Some newly introduced pitfalls may be avoided through additional disclosure, but it will be difficult to discern the proper role of these new provisions until a body of jurisprudence is developed.

Should you wish to discuss how any of the above points may impact your business, please contact the authors.

1 Budget 2023: Tax Measures: Supplementary Information, at page 38


3 More specifically, the disclosure must be in accordance with subsection 237.3(2) or proposed subsection 237.3(12.1) of the Income Tax Act in order to avoid penalties.

4 More specifically, the disclosure must be in accordance with section 237.3 of the Income Tax Act in order to avoid the extended limitation period.


While leading Baker McKenzie's Canadian Tax Practice, Jacques Bernier assists his clients in resolving their Canadian tax controversies and litigating them before the courts. He also provides strategic advice to a number of multinationals in their dealings with the Canadian tax authorities and the relationship partner to many Firm clients meeting their tax needs in Canada and abroad. He is singled out for his transfer pricing expertise and recognized as a leading practitioner in Chambers Global and Euromoney's Guide to the World's Leading Transfer Pricing Advisors, as well as being consistently recommended for corporate tax litigation by Canadian Lexpert Legal Directory. According to Chambers Global, Mr. Bernier is "very determined, pragmatic and knowledgeable" and the "go-to-guy" in Canada. Sources also say: "He's thoughtful, he's calm, he thinks of the entire journey and the objective. He's responsive, very professional and easy to talk to."


Andrew Boyd is a partner in Baker McKenzie's Tax Practice Group in Toronto. His practice focuses on tax litigation and dispute resolution. Andrew is also an active member of the tax community, having served on the Steering Committee of the Canadian Tax Foundation’s Young Practitioner’s Group (Toronto) for four years, during which time he organized and moderated presentations on topics such as rectification, developments in GAAR jurisprudence, responding to audits, the changing tax litigation landscape, et cetera. He has also presented on evidentiary issues that arise in Tax Court trials and best practices for working with expert witnesses.

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