2022 Canadian Federal Budget: Administration and disputes

On April 7, the minister of finance tabled the 2022 federal budget, including proposed amendments to the Income Tax Act (Canada) (ITA).

Among the amendments are significant changes to the general anti-avoidance rule (GAAR) found at section 245 of the ITA.

Significant change to the notion of tax benefit under GAAR

Since its introduction in 1988, the GAAR has been applied by the Canada Revenue Agency (CRA) to deny tax benefits obtained by taxpayers through what it considered to be abusive avoidance transactions.

For the purposes of GAAR, “tax benefit” is currently defined at subsection 245(1) of the ITA as a (i) reduction, avoidance or deferral of tax or other amount or (ii) an increase in a refund of tax or other amount. 

The GAAR is applied by CRA through issuing a notice of assessment pursuant to which a tax benefit obtained by a taxpayer would be denied. Once GAAR is applied to a transaction, CRA can determine the reasonable tax consequences, including the amount of a tax attribute (such as the adjusted cost base of a property or the paid-up capital of a share) relevant for the purpose of computing tax.

Up until 2018, the courts had always considered the application of GAAR to transactions resulting in a tax benefit that had materialized as part of the transactions. Simply put, GAAR assessments had always been established on the basis that tax had been reduced, avoided or deferred as a result of the transactions.

In 2018, the Federal Court of Appeal, in 1245989 Alberta Ltd. v. Canada (Attorney General) (also referred to as Wild v. Canada (Attorney General)), held that GAAR did not apply to a transaction that resulted in an increase in a tax attribute, namely paid-up capital, which had not been materialized (i.e., which had not at the time of issuing the notice of assessment for that particular taxation year, been used to reduce, avoid or defer tax). 

The Federal Court of Appeal held that the mere increase in a tax attribute that could, potentially and eventually (if and when subsequent transactions are carried out by the taxpayer) result in the reduction, avoidance or deferral of tax did not result in a tax benefit under subsection 245(1), such that CRA could not apply GAAR to the transactions.
The Tax Court of Canada and Federal Court of Appeal have since followed this decision, and refused to apply GAAR to transactions pursuant to which a tax attribute had been increased, but not yet materialized.

Budget 2022 proposes that the ITA be amended to provide that GAAR can be applied by CRA to transactions that affect tax attributes that have not yet materialized, by expanding the definition of “tax benefit” and “tax consequences.”

The ITA would be amended (specifically, subsection 151(1.11)) to allow CRA to establish notices of determination reflecting the modified tax attributes pursuant to GAAR. Such determinations (unlike re-assessments) would not have any impact on the taxes payable for the present or past year, but would be binding on the taxpayer and CRA for future years, when the modified tax attributes would be taken into account for the computation of taxes.

Of course, taxpayers would have the right to object to the determinations and appeal the application of GAAR to the Tax Court of Canada, as is currently the case when the tax benefit is materialized and a notice of assessment has been issued.

While further details on these new rules should follow, it is important to note Budget 2022 mentions the changes to section 245 would apply to notices of determination issued on or after Budget Day, meaning if these proposals come into force, CRA could make adjustments to tax attributes resulting from transactions that had already taken place prior to Budget Day.

The minister of finance also intends to soon release a broader consultation paper on modernizing the GAAR, with a consultation period running through the summer of 2022, and with legislative proposals to be tabled by the end of 2022.

Increased budget for tax audits

Budget 2022 announces the federal government’s intention to provide $1.2 billion over five years, starting in 2022-23, for the CRA to expand its activities, including audits of large entities and non-residents with respect to aggressive tax planning. An increase in the number and length of audits is therefore to be expected in the coming years.

Previously announced measures

Budget 2022 confirms the government’s intention to proceed with certain previously announced tax measures, which have been the subject of public consultations and deliberations with interested parties, including the following:

• Mandatory disclosure rules, including reportable transactions, notifiable transactions and uncertain tax treatments;
• Avoidance of tax debt through asset transfers;
• Expansion of CRA’s powers to increase audit and verification powers.

These previously announced tax measures were discussed in length in our April 19, 2021 publication on the 2021 Canadian federal budget.

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