The Minister's Burden Under GAAR

The long-awaited Supreme Court of Canada decisions in Canada Trustco and Mathew, described by some as the most important Supreme Court tax cases in a generation, have provoked significant discussion and controversy. This article examines one particular aspect of the guidelines provided by the Supreme Court in analyzing the application of section 245 (the general anti-avoidance rule [GAAR]): the minister's burden under GAAR. In setting out the three requirements for GAAR to apply - a tax benefit, an avoidance transaction, and abusive tax avoidance - the Supreme Court indicated that it is the taxpayer's burden to refute the first two, and the minister's burden to establish the third. While there is no specific burden imposed on the minister under the first two requirements, the author suggests that the assumptions upon which the minister's GAAR assessment is based must set out a prima facie case. The author suggests that the first requirement, a tax benefit, should not pose any difficulty for the minister, in light of the Supreme Court's interpretation of this term. In most cases, where the taxpayer has benefited from some deduction in determining income or taxable income, it is simply a matter of identifying that deduction. It is only in other cases - for example, where the tax benefit results from a deferral or a recharacterization of income - that the minister must identify an alternative arrangement for comparison. The second requirement, an avoidance transaction, similarly should not pose difficulties for the minister if the minister's arguments recognize and are shaped by a taxonomy of tax-avoidance transactions. The author suggests that all tax-avoidance transactions fit one of three fact patterns: substitutable transactions, tax attribute trading, and tax attribute fabrication. Within this taxonomy, all tax-avoidance cases should easily meet the first two requirements of a GAAR analysis; it is on the third requirement that the courts should focus. The minister should choose the appropriate cases to litigate accordingly. The third requirement in a GAAR analysis, abusive tax avoidance, involves both questions of fact and questions of law. The author suggests that in discussing subsection 245(4), the Supreme Court appears to confuse a litigant's, specifically the minister's, burden of proof - an evidentiary burden in questions of fact - with the court's obligation to answer questions of law. The author suggests that subsection 245(4) involves two distinct inquiries: the first, a question purely of law, is to interpret the legislative intent of the statutory provisions in issue; the second, a mixed question of fact and law, is to determine whether the avoidance transaction frustrates the legislative intent so established. In the author's view, it is inappropriate for the court to combine these two distinct inquiries into one overall inquiry involving a mixed question of fact and law. Furthermore, the author maintains that the minister has no burden of proof in the first inquiry. Legislative intent is a matter for the court to decide. Finally, given the important questions of law that must be considered in any GAAR case, the author questions the Supreme Court's obvious reluctance to hear further GAAR cases and its apparent admonishment of the Federal Court not to interfere with Tax Court decisions.

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