Quebec Considers Expanding the General Anti-Avoidance Rule After Lipson v Canada

Following on the heels of last month’s Supreme Court of Canada (“SCC”) decision in Lipson v Canada, 2009 SCC 3 [Lipson], Quebec’s Finance Ministry has announced plans to implement further legislative measures to curb aggressive tax planning. Its Working Paper on Aggressive Tax Planning (Document de consultation des planifications fiscales agressives) can be found here. Among its more interesting proposals is the plan to penalize taxpayers who engage in tax avoidance regimes that trigger the General Anti-Avoidance Rule (GAAR). As you may recall, the GAAR is an umbrella rule that prohibits any transaction or series of transactions that exploit the rules of the income tax regime in an abusive way.

Background

TheCourt.ca has already provided extensive commentary on Lipson. In brief, the SCC held that a series of transactions can attract the GAAR if, as a whole, the series frustrates the purpose of one or more Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], provisions it relies upon. The Lipson decision has been criticized by tax planners for creating greater uncertainty for taxpayers organizing their finances.

In light of the developments in Lipson, Quebec’s Finance Ministry appears to be striking while the iron is hot by proposing several changes to the provincial GAAR in hopes of minimizing aggressive tax planning. The Working Papers reveal that the Ministry is considering extending the limitation period of a GAAR reassessment by three years. It is also contemplating a penalty regime for the GAAR:

Introduction of a penalty contingent on the application of the GAAR is under consideration. As a result of such a penalty, not only would the taxpayer be liable for the tax he should have paid in any event had he not abused the object, spirit or purpose of the law, but he would also have to pay an amount because of the abusive tax approach he adopted.

Besides, a taxpayer may have used an ATP scheme proposed by a promoter. By contributing to the ATP phenomenon, the promoter could, like the taxpayer, be required to pay a penalty.

The Working Paper Proposals

Under the proposals in the Working Paper, any transaction or series of transaction that is found to be abusive would be subject to a sanction of up to 25% of the additional tax under the GAAR reassessment. Promoters of an aggressive tax plan would also be subject to a penalty of 12.5% of the amount receivable for having sold the impugned tax plan.

The GAAR currently does not punish taxpayers or tax promoters for engaging in transactions that trigger GAAR reassessment. If a tax scheme is found to be abusive, the GAAR simply reassesses the taxpayer’s taxable income as if the scheme’s transactions did not take place. The taxpayer is therefore not in any worse a position than she would be if she had not engaged in the anti-avoidance scheme.

A financial penalty would deter tax planners from looking for loopholes and attempting abusive tax avoidance. Taxpayers who are unsure whether their tax plan is abusive may still avoid the penalty if they disclosed the scheme early to Revenu Québec. Notwithstanding disclosure, however, the penalization of GAAR threatens to turn aggressive tax avoidance into a lighter form of tax evasion.

The Working Paper’s recommendations concern only Quebec’s Taxation Act, RSQ, c I-3, but they may be a harbinger for developments across the country. Quebec’s Taxation Act has its own GAAR, whose wording is virtually identical to that in the federal ITA. If the Working Paper’s recommendations are adopted, the other provinces and the federal government may follow suit and implement penalty schemes in their respective income tax legislation.

On another note, the Working Papers also offer some insight into how the government (in Quebec, at least) is interpreting the relationship between the GAAR and specific anti-avoidance provisions:

Where it is shown that the conditions for the application of a specific anti-avoidance rule are satisfied, the remedy it stipulates must be applied. The tax authorities cannot then invoke the GAAR to substitute a remedy they consider more suitable.

The government has evidently adopted Justice Rothstein’s opinion in Lipson that any specific anti-avoidance rule overrides the GAAR; that is, if a particular tax transaction already attracts a specific anti-avoidance rule, the GAAR does not apply. The majority in Lipson did not address this issue.