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June 13, 2024

Tax Tips

First GAAR Case After Supreme Court Decision
Subject: GAAR
Number: 05-34
Date: 12/16/2005
The Evans case clarifies the practical application of GAAR

A recent case (Evans) decided by Chief Justice Bowman of the Tax Court of Canada is the first case dealing with GAAR after the Supreme Court decisions on the same subject. In the Evans case, Dr. Evans owned a professional corporation in Alberta. The corporation issued a stock dividend of preferred shares to Dr. Evans. The next day, the preferred shares were sold to a limited partnership consisting of Dr. Evans' wife as general partner and three of his children as limited partners. The price was the fair market value of $487,000 and a promissory note in that amount was given to Dr. Evans by the partnership. The note was interest-bearing at 5% per annum. Dr. Evans realized a capital gain of $486,900 and he claimed the capital gains exemption so that he paid no tax in respect of the disposition. Over the next three years, the professional corporation paid amounts to the partnership by way of dividends and redemptions of the preferred shares. The dividends were included in the partnership's income and allocated to the various partners. Since the partners had little or no other income, the tax that they paid on the allocated dividend income was very low.

The CRA tried to apply GAAR to this situation. Judge Bowman went through a detailed analysis of what the Supreme Court's decision meant on a practical basis. He had some interesting comments as listed below:

  • The GAAR draws a line between legitimate tax minimization and abusive tax avoidance.
  • GAAR does not permit a transaction to be considered to be an avoidance transaction because some alternative transactions that might have achieved an equivalent result would have resulted in higher taxes.
  • Parliament did not intend the GAAR rules to operate simply as a business purpose test.
He stated that there cannot be "an abuse of the provisions of the Act where each section operates exactly the way it was supposed to."

The Tax Court Judge decided that GAAR did not apply in this situation and that the tax results should remain as they were originally filed.

It is strongly recommended that all people who deal with tax matters read this case as it is excellent guidance as to how the GAAR rules will be applied in the future.

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