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Supreme Court of Canada Releases GAAR Decision

On December 16, 2011 the Supreme Court of Canada (SCC) released its decision in Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 (Copthorne).  The full decision can be viewed on the SCC Judgements website at

 Copthorne involved the application of the General Anti-Avoidance Rule, or as it is commonly referred to, GAAR. 

 GAAR applies to deny the tax benefit of a transaction or series of transactions despite the fact that the taxpayer seems entitled to the tax benefit on a technical reading of the relevant legislation. 

 In order for GAAR to apply three requirements must be met: 

  1. a tax benefit must arise from a transaction or series of transactions;
  2. the transaction or series of transactions must be an “avoidance transaction” as defined in subsection 245(3) of the Income Tax Act; and
  3. the tax benefit must be a misuse or abuse of the relevant provisions of the tax legislation.

In Copthorne the SCC applied tests enunciated in previous decisions applying GAAR.  The SCC found that all three elements required to apply GAAR had been satisfied and denied the tax benefit of the series of transactions.

Copthorne involved a horizontal amalgamation of two sister corporations and subsequent redemption of shares by the parent company.  The series of transactions was structured in such a way that the “paid up capital” of the redeemed shares exceeded the original investment with the result that the redemption of the shares did not trigger any tax. 

The SCC found that: (1) there was a tax benefit; (2) the series of transactions included a transaction that was an avoidance transaction; and (3) the tax benefit was a misuse or abuse of a provision of the Income Tax Act

Of particular note is that the SCC found that it is not enough that a transaction is a misuse or abuse of tax policy.  The misuse or abuse must be tied to a specific provision or provisions. 

If you are engaged in a transaction that provides you with a tax benefit you must not only analyze whether you are technically entitled to the tax benefit, but you must also be alive to whether GAAR could apply to deny the tax benefit. 


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