general anti-avoidance rules revisited: reflections on tim … 2020/issue 2... · 2020. 7. 19. ·...

canadian tax journal / revue fiscale canadienne (2020) 68:2, 579 - 611https://doi.org/10.32721/ctj.2020.68.2.sym.duff

579

General Anti-Avoidance Rules Revisited: Reflections on Tim Edgar’s “Building a Better GAAR”

David G. Duff*

P R É C I S

Outre l’exigence de la réalisation d’un avantage fiscal, l’application de la plupart des règles générales anti-évitement modernes repose sur deux éléments : ce qu’on appelle un « élément subjectif » qui tient compte de l’objet de l’opération entreprise ou de l’entente conclue donnant lieu à l’avantage fiscal; et un « élément objectif » qui tient compte du but ou de l’objet des dispositions pertinentes pour déterminer si l’avantage fiscal résultant de l’opération ou de l’entente est ou non compatible avec ce but ou cet objet.

Bien que ces deux éléments soient présents dans la plupart des RGAE modernes, la fonction de chaque élément dans ces règles et la relation entre eux sont souvent mal comprises. D’autres questions non résolues concernent les rôles du caractère artificiel et de la substance économique dans l’application de ces règles, et la relation, le cas échéant, entre ces concepts et les éléments « subjectif » et « objectif » des règles. Une dernière série de questions concerne l’incertitude que les RGAE peuvent engendrer, la capacité des juges à appliquer ces règles et principes de manière cohérente et constante, et la compatibilité de ces règles et principes avec la règle de droit.

Cet essai aborde ces questions en examinant l’article de Tim Edgar « Building a Better GAAR ». La partie I examine la justification d’une règle ou d’un principe général anti-évitement, en faisant valoir que cette règle ou ce principe représente non seulement une réponse politique utile aux conséquences néfastes de l’évitement fiscal (l’argument conséquentialiste que le professeur Edgar a fait sien), mais qu’il peut également se justifier d’un point de vue non conséquentialiste voulant qu’il protège l’intégrité des dispositions visées et respecte ainsi la règle de droit. La partie III s’appuie sur cette analyse pour examiner la conception d’une règle ou d’un principe général anti-évitement, en soutenant que cette règle ou ce principe devrait être codifié sous la forme d’une règle explicite, qu’il devrait inclure des éléments subjectif et objectif comme les

* ProfessorofLawandDirector,TaxLLMProgram,Peter A.AllardSchoolofLaw,UniversityofBritishColumbia.ThisessaydevelopsandexpandsonremarkspresentedatRe-ImaginingTaxforthe21stCentury:AConferenceInspiredbytheScholarshipofTimEdgar,OsgoodeHallLawSchool,Toronto,onFebruary 8-9,2019.Iamgratefultotheorganizersoftheconference,particularlyJinyanLi,forinvitingmetoparticipateinthiseventtohonourTim’slegacy,andabovealltoTimhimself—afriendandcolleague,whoseworkonGAARencouragedmetodevelopmyownthinkingonthesubject.

580 n canadian tax journal / revue fiscale canadienne (2020) 68:2

exigences en matière d’objet et de détournement ou d’abus dans la RGAE canadienne, et qu’il devrait se fonder sur les concepts de caractère artificiel et de substance économique qui s’appliquent respectivement aux éléments subjectif et objectif de la règle. La partie IV présente la conclusion.

A B S T R A C T

In addition to the requirement of a tax benefit or advantage, the application of most modern general anti-avoidance rules (GAARs) turns on two elements: a “subjective element,” which considers the purpose for which the transaction or arrangement resulting in the tax benefit or advantage was undertaken or arranged; and an “objective element,” which considers the object or purpose of the relevant provisions to determine whether the tax benefit resulting from the transaction or arrangement is consistent with this object or purpose.

Although these two elements are present in most modern GAARs, the function of each element within these rules and the relationship between them are often poorly understood. Other unresolved issues concern the roles of artificiality and economic substance in the application of these rules, and the relationship, if any, between these concepts and the “subjective” and “objective” elements of the rules. A final set of issues involves the uncertainty that GAARs may engender, the ability of judges to apply these rules and principles in a coherent and consistent manner, and the compatibility of these rules and principles with the rule of law.

The author addresses these issues by reflecting on Tim Edgar’s article “Building a Better GAAR.” The first part of the paper considers the rationale for a general anti-avoidance rule or principle, arguing that such a rule not only represents a useful policy response to the harmful consequences of tax avoidance (the consequentialist argument that Professor Edgar espoused), but also may be justified on the non-consequentialist grounds that it protects the integrity of the provisions at issue and thereby upholds the rule of law. In the second part of the paper, the author builds on this analysis to consider the design of a general anti-avoidance rule or principle, arguing that it should be codified in the form of an explicit rule, should include subjective and objective elements such as the “purpose” and “misuse or abuse” requirements in the Canadian GAAR, and should be informed by concepts of artificiality and economic substance that apply to, respectively, the subjective and objective elements of the rule.

KEYWORDS: AVOIDANCE n ANTI-AVOIDANCE n GAAR n GENERAL ANTI-AVOIDANCE RULE

C O N T E N T S

Introduction 581Rationale 584

Consequentialist Arguments 584Non-Consequentialist Arguments 589

Design 591Codification 591Subjective and Objective Elements 593

Purpose Test 593Misuse or Abuse Test 602

Conclusion 610

reflections on tim edgar’s “building a better gaar” n 581

INTRODUCTION

Inadditiontotheexistenceofataxbenefit,whichisgenerallyquiteeasytoestab-lish,1applicationoftheCanadiangeneralanti-avoidancerule(GAAR)turnsontwoelements:(1) apurposetestthatexcludestransactionsthatmayreasonablybeconsid-eredtohavebeenundertakenorarrangedprimarilyforbonafidenon-taxpurposes,2 and(2) amisuseorabusetestprovidingthatGAARappliesonlytotransactionsthatmayreasonablybeconsideredtoresultdirectlyorindirectlyinamisuseofspecificprovisionsof the ITAorotherrelevantenactmentsoranabusehavingregardtotheseprovisionsreadasawhole.3ThesetwoelementsappearinmostothermodernGAARs,4includingtheUnitedKingdom’sgeneralanti-abuseruleenactedin2013,5 and

1 IncomeTaxAct,RSC1985,c.1(5thSupp.),asamended(hereinreferredtoas“theITA”),subsection 245(1),defininga“taxbenefit”as“areduction,avoidanceordeferraloftaxorotheramountpayableunderthisActoranincreaseinarefundoftaxorotheramountunderthisAct”includingwherethesetaxconsequencesresultfromtheapplicationofataxtreaty.Althoughthislanguagesuggeststhatataxbenefitshouldbeassessedincomparisontoa“benchmark”transactionorarrangementthatmightreasonablyhavebeenundertakenorarrangedbutfortheexistenceofthetaxbenefit,theSupremeCourtofCanadaloweredthethresholdforataxbenefitinCanada Trustco Mortgage Co. v. Canada,2005SCC54,atparagraph 20,statingthatadeductionalwaysresultsinataxbenefit“sinceadeductionresultsin[the]reductionoftax.”AccordingtotheFederalCourtofAppeal,ontheotherhand,ataxattributelikepaid-upcapitalmustberealizedintheformofareductionintaxbeforeitconstitutesataxbenefitundertheITA:Wild,sub nom.1245989 Alberta Ltd. v. Canada (Attorney General),2018FCA114.Aswell,wherethetaxbenefitresultsfromaseriesoftransactions,thecharacterizationofthisseriescanalsobeatissue,although,hereagain,theSupremeCourtofCanadahasloweredthethresholdtosomeextentbyadoptingabroadinterpretationoftheextendeddefinitionofaseriesoftransactionsinsubsection 248(1)toincluderelatedtransactionscompletedbeforeorafteranordinaryseries.See,forexample,Copthorne Holdings Ltd. v. Canada,2011SCC63,atparagraphs 42-64.

2 ITAsubsection 245(3). 3 ITAsubsection 245(4). 4 Forarecentsurvey,seeMichaelLanget al.,eds.,GAARs—A Key Element of Tax Systems in the

Post-BEPS World(Amsterdam:IBFD,2016).TwonotableexceptionsaretheNewZealandGAAR,whichdatesbacktothe19thcenturybutwassubstantiallyamendedin1974,andtheAustralianGAAR,whichalsodatesbacktothe19thcenturybutwassubstantiallyamendedin1981.InNewZealand,courtshaveeffectivelycreatedamisuseorabusetestthrougha“parliamentarycontemplationtest”thatasks“whethertheimpugnedarrangement,viewedinacommerciallyandeconomicallyrealisticway,makesuseofthespecificprovisioninamannerthatisconsistentwithParliament’spurpose.”SeeBen Nevis Forestry Ventures Ltd v. Commissioner of Inland Revenue,[2008]NZSC115,atparagraph 109.ForausefuldiscussionoftheNewZealandGAAR,seeCraigElliffe,“PolicyForum:NewZealand’sGeneralAnti-AvoidanceRule—ATriumphofFlexibilityOverCertainty”(2014)62:1Canadian Tax Journal 147-64.InAustralia,anarrowexceptionfromthedefinitionofa“taxbenefit”excludesthenon-inclusionofincome,theallowanceofadeduction,theincurringofacapitallossorallowance,oraforeigntaxcreditthatis“attributabletothemakingofanagreement,choice,declaration,electionorselection,thegivingofanoticeortheexerciseofanoptionexpresslyprovidedfor”inthetaxlegislation—providedthat“theschemewasnotenteredintoorcarriedoutbyanypersonforthepurposeofcreatinganycircumstanceorstateofaffairstheexistence

(Notes4and5arecontinuedonthenextpage.)


theprincipalpurposetest(PPT)intheOrganisationforEconomicCo-operationandDevelopment(OECD)modelconventionandthemultilateralinstrument(MLI),6 as wellasgeneralanti-avoidanceprinciples (GANTIPs)suchas theOECD’s“guidingprinciple”ontaxtreatyabuse,onwhichthePPTisbased,7andtheanti-abuseprincipledevelopedbytheEuropeanCourtofJusticeandsubsequentlycodifiedinaEuropeanCouncilDirective layingdownrulesagainst tax-avoidancepractices thatdirectlyaffectthefunctioningoftheinternalmarket.8

ofwhichisnecessarytoenablethedeclaration,agreement,election,selection,choice,noticeoroptiontobemade,givenorexercised,asthecasemaybe.”SeeIncomeTaxAssessmentAct1936,No. 27,1936,(hereinreferredtoas“theAustralianGAAR”),sections 177C(2)(i)and(ii).ForausefulcomparisonoftheCanadianandAustralianGAARs,seeJulieCassidy,“ToGAARorNotToGAAR—ThatIstheQuestion:CanadianandAustralianAttemptsToCombatTaxAvoidance”(2005)36:2Ottawa Law Review259-313.

5 FinanceAct2013(UK),2003,c.29(hereinreferredtoas“theUKGAAR”),sections 206to215,whichappliesto“taxarrangementsthatareabusive”andinwhicha“taxarrangement”isdefinedasanarrangementif,havingregardtoallthecircumstances,itwouldbereasonabletoconcludethattheobtainingofataxadvantagewasthemainpurpose,oroneofthemainpurposes,ofthearrangement,andataxarrangementisconsideredtobe“abusive”if“theenteringintoorcarryingoutofthe[taxarrangement]cannotreasonablyberegardedasareasonablecourseofactioninrelationtotherelevanttaxprovisions,havingregardtoallthecircumstancesincluding—(a) wherethesubstantiveresultsofthearrangementsareconsistentwithanyprinciplesonwhichthoseprovisionsarebased(whetherexpressorimplied)andthepolicyobjectivesofthoseprovisions,(b) whetherthemeansofachievingthoseresultsinvolvesoneormorecontrivedorabnormalsteps,and(c) whetherthearrangementsareintendedtoexploitanyshortcomingsinthoseprovisions.”SeeJudithFreedman,“DesigningaGeneralAnti-AbuseRule:StrikingaBalance”(2014)20:3Asia-Pacific Tax Bulletin167-73,at 170.

6 Article29(9)ofOrganisationforEconomicCo-operationandDevelopment,Model Tax Convention on Income and on Capital: Condensed Version(Paris:OECD,November 2017)(hereinreferredtoas“theOECDmodelconvention”);andarticle 7(1)ofOrganisationforEconomicCo-operationandDevelopmentMultilateralConventionToImplementTaxTreatyRelatedMeasuresToPreventBaseErosionandProfitShifting,releasedonNovember 24,2016(hereinreferredtoas“theMLI”).Accordingtothisprovision,abenefitundertheconvention“shallnotbegrantedinrespectofanitemofincomeorcapitalifitisreasonabletoconclude,havingregardtoallrelevantfactsandcircumstances,thatobtainingthatbenefitwasoneoftheprincipalpurposesofanyarrangementortransactionthatresulteddirectlyorindirectlyinthatbenefit,unlessitisestablishedthatgrantingthatbenefitinthesecircumstanceswouldbeinaccordancewiththeobjectandpurposeoftherelevantprovisionsofthisConvention.”

7 Accordingtothisprinciple,“thebenefitsofadoubletaxationconventionshouldnotbeavailablewhereamainpurposeforenteringintocertaintransactionsorarrangementswastosecureamorefavourabletaxpositionandobtainingthatmorefavourabletreatmentinthesecircumstanceswouldbecontrarytotheobjectandpurposeoftherelevantprovisions.”Thisprinciplewasaddedtoparagraph 9.6ofthecommentaryonarticle 1ofOrganisationforEconomicCo-operationandDevelopment,Model Tax Convention on Income and on Capital (Paris:OECD,January 2003)(hereinreferredtoas“the2003OECDmodelconvention”).Thesametextappearsinparagraph 61ofthecommentaryonarticle 1ofthecurrentOECDmodelconvention.

8 Seearticle 6(1)ofEuropeanUnion,CouncilDirective2016/1164/EUof12July 2016,LayingDownRulesAgainstTaxAvoidancePracticesThatDirectlyAffecttheFunctioningoftheInternalMarket,OJ L 193/1,July 19,2016,whichprovidesthatMemberStatesshall,


Asaresult,likemostmodernGAARs and GANTIPs,theCanadianGAARincludesa“subjectiveelement”concerningthepurposeofthetransactionorarrangementthat results in a taxbenefit, andan“objectiveelement” regarding themisuseorabuseofrelevantprovisions.9Whilethefirstelementdemandsaninquiryintothepurposesforwhichthetransactionwasundertakenorarrangedinordertodeter-minetheextenttowhichtaxconsiderationsplayedarole,thesecondinvolvesaninterpretiveexercisetodeterminewhetherthetaxbenefitresultingfromthetrans-actionorarrangementis(orisnot)consistentwiththeobject,spirit,orpurposeoftherelevantprovisions.10

AlthoughthesetwoelementsarepresentinmostmodernGAARs and GANTIPs, thefunctionofeachelementwithintheserulesandprinciplesandtherelation-shipbetweentheseelements isoftenpoorlyunderstood.Somecommentators,forexample,havequestionedtheneedfor thefirstelement,11whileothershavechallengedthescopeofthesecond.12Otherunresolvedissuesconcerntherolesof

forthepurposeofcalculatingcorporatetaxliability,“ignoreanarrangementoraseriesofarrangementswhich,havingbeenputintoplaceforthemainpurposeoroneofthemainpurposesofobtainingataxadvantagethatdefeatstheobjectorpurposeoftheapplicabletaxlaw,arenotgenuinehavingregardtoallrelevantfactsandcircumstances.”AsexplainedbyRitadeLaFeria,“EUGeneralAnti-(Tax)AvoidanceMechanisms,”inGlenLoutzenhiserand Ritade la Feria,eds.,The Dynamics of Taxation: Essays in Honour of Judith Freedman(Oxford,UK:Hart,2020),thisdirectivecodifiestheprinciplesestablishedinleadingjudgmentsoftheEuropeanCourtofJustice,includinginparticularHalifax plc, Leeds Permanent Development Services Ltd., County Wide Property Investments Ltd. v. Commissioners of Customs & Excise,CaseC-255/02;[2006]ECRI-1609;andCadbury Schweppes plc, Cadbury Schweppes Overseas Ltd. v. Commissioners of Inland Revenue,CaseC-196/04;[2006]ECRI-7995.Forfurtherdiscussionsofthesecases,seeRitade la Feria,“ProhibitionofAbuseof(Community)Law—TheCreationof aNewGeneralPrincipleofECLawThroughTax”(2008)45:2Common Market Law Review 395-442;andJudithFreedman,“TheAnatomyofTaxAvoidanceCounteraction:AbuseofLawinaTaxContextatMemberStateandEuropeanUnionLevel,”inRitade la FeriaandStefanVogenauer,eds.,Prohibition of Abuse of Law: A New Principle of EU Law?(Oxford,UK:Hart,2011),365-80(http://dx.doi.org/10.5040/9781472565570.ch-025).TheuseoftheacronymGANTIPratherthanGAAPtocharacterizetheseprincipleswasproposedbyJudithFreedmaninordertoavoidconfusionwiththeacronymforgenerallyacceptedaccountingprinciples.SeeJudithFreedman,“DefiningTaxpayerResponsibility:InSupportofaGeneralAnti-AvoidancePrinciple”[2004]no.4British Tax Review332-57.

9 Thelanguageof“subjective”and“objective”elementsappearsintheEuropeanCourtofJusticedecisioninEmsland-Stärke GmbH v. Hauptzollamt Hamburg-Jonas,CaseC-110/99;[2000]ECRI-11569.Asexplainedintextaccompanyinginfranotes 85-112,theso-called“subjectiveelement”isproperlyassessedobjectively.

10 Canada Trustco,supranote 1,atparagraph 55. 11 See,forexample,MichaelLang,“CadburySchweppes’LineofCaseLawfromtheMember

States’Perspective,”inProhibition of Abuse of Law,supranote 8,at 435-58(http://dx.doi.org/ 10.5040/9781472565570.ch-030).

12 TimEdgar,“BuildingaBetterGAAR”(2008)27:4Virginia Tax Review833-905.AcondensedversionofthisarticlealsoappearsasTimEdgar,“DesigningandImplementingaTarget-EffectiveGeneralAnti-AvoidanceRule,”inDavid G.DuffandHarryErlichman,eds.,Tax Avoidance in Canada After Canada Trustco and Mathew(Toronto:IrwinLaw,2007),221-58.


artificialityandeconomicsubstanceintheapplicationofGAARsandprinciples,andthe relationship, if any,between these concepts and the subjective andobjectiveelements.AfinalsetofissuesinvolvestheuncertaintythatGAARsandprinciplesmayengender,theabilityofjudgestoapplytheserulesandprinciplesinacoherentandconsistentmanner,andthecompatibilityoftheserulesandprincipleswiththeruleoflaw.

Inthispaper,IaddresstheseissuesbyreflectingonTimEdgar’sarticle“Buildinga Better GAAR,”13whichwaspublishedshortlyaftertheSupremeCourtofCanada’sfirstGAAR decisions in Canada Trustco and Matthew.14Inthefirstpartofthepaper,Iconsidertherationaleforageneralanti-avoidanceruleorprinciple,arguingthatsucharulenotonlyrepresentsanimportantpolicyresponsetotheharmfulconse-quences of tax avoidance (the consequentialist argument that Professor Edgarespoused),but alsomaybe justifiedon thenon-consequentialistgrounds that itprotectstheintegrityoftheprovisionsatissueandtherebyupholdstheruleoflaw.Inthesecondpartofthepaper,Ibuildonthisanalysistoconsiderthedesignofageneralanti-avoidanceruleorprinciple,arguingthatitshould(1) becodifiedinthe formofanexplicitrule,(2) includesubjectiveandobjectiveelementssuchasthepurpose andmisuseor abuse requirements in theCanadianGAAR, and (3) be in-formedbyconceptsofartificialityandeconomicsubstancethatapplyto,respectively,thesubjectiveandobjectiveelementsoftherule.

RATIONALE

Mostargumentsinfavourofgeneralanti-avoidancerulesandprinciplesemphasizetheadverseeffectsoftaxavoidanceontaxrevenues,economicefficiency,fairness,andtaxcompliance,andtheadvantagesofabroadstandardtolimittaxavoidanceinadditiontomoredetailedprovisionsandspecificanti-avoidancerules.Inadditionto theseconsequentialistarguments,anon-consequentialist rationale forgeneralanti-avoidancerulesandprinciplesemphasizestheintegrityoftheprovisionsthatcouldotherwisebecircumventedbytransactionsthatareundertakenorarrangedin order to obtain tax benefits. Below, I review these consequentialist and non-consequentialist arguments, concluding that collectively they form a compellingargument forgeneralanti-avoidancerulesandprinciplesasageneraloverlayonspecifictaxprovisions.

Consequentialist Arguments

AsProfessorEdgarnotes,the“mostobviousconsequentialattribute”oftaxavoidanceis therevenuelossesattributabletothesubstitutionof lower-taxedtransactionsorarrangements for higher-taxed alternatives.15Not surprisingly, therefore, concerns

13 Ibid. 14 Canada Trustco,supranote 1;andMatthew v. Canada,2005SCC55(sometimescitedsubnom.

Kaulius v. The Queen,2005DTC5538(SCC)). 15 Edgar,“BuildingaBetterGAAR,”supranote 12,at 844.


aboutrevenuelossesareoftenidentifiedasaprimaryreasontointroduceorstrength-enmeasuressuchasstatutoryGAARstocombattaxavoidance.16

Fromaconsequentialistperspective,however,thefactthattaxavoidancereducesgovernmentrevenuesisnotitselfagoodreasontolimitthisbehaviour.Onthecon-trary,somehavearguedthattotheextentthatgovernmentspendingisexcessive,at leastsometaxavoidancemaybedesirableasawaytoreducethesizeofgovern-ment.17 Similarly, it could be argued that tax avoidance improves the overallefficiencyorfairnessofthetaxsystemwheregovernmentsreplaceforgonerevenuesfromanavoidedtaxwithrevenuesfromamoreefficientorotherwisemoreattract-ivetax.18Asaresult,theconsequentialistargumentforanti-avoidancemeasurestopreventrevenuelossesnecessarilyturnseitherontheassumptionthatthesizeofgovernmentisoptimalorsuboptimalandthatthetaxsystemisefficient,orontheconclusionthattaxavoidanceisaninferiorwaytoregulategovernmentspendingandpromoteabettertaxsystem,comparedwithmoredirectmethodsofpursuingtheseobjectives.Whateveronemaythinkaboutthesizeofgovernmentandtheefficiencyofthecurrenttaxsystem,itseemsreasonabletoconcludethattaxavoid-anceisnotthebestwaytoaddresstheseissues.19

Inadditiontorevenuelosses,taxavoidancecanbeeconomicallycostly,distortingtheallocationofeconomicresources,20encouraginginvestmentsinactivitiesthatmaybemarginallyprofitableatbest,21anddivertingscarceresourcesfromproduc-tiveactivitiesandinvestmentsto“thedevelopment,marketing,implementationand

16 See,forexample,SouthAfricanRevenueService,Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962)(Pretoria:SARS,November 2005),at 9.Forarelativelyrecentreportthatestimatestheglobalrevenuelossfromcorporatetaxavoidanceat$500 billion,seeAlexCobhamandPetrJanský,Global Distribution of Revenue Loss from Tax Avoidance: Re-Estimation and Country Results,WIDERWorkingPaper no.2017/55(Helsinki:UnitedNationsUniversityWorldInstituteforDevelopmentEconomicsResearch,March 2017).

17 See,forexample,GaryS.BeckerandCaseyB.Mulligan,“DeadweightCostsandtheSizeofGovernment”(2003)46:2Journal of Law and Economics293-340.Itis,ofcourse,alsopossiblethatgovernmentspendingisdeficientorfinancedexcessivelybydebtinsteadoftaxation,inwhichcaserevenuelossesfromtaxavoidancewouldonlyexacerbatetheseproblems.

18 SeethediscussioninDavidA.Weisbach,“AnEconomicAnalysisofAnti-Tax-AvoidanceDoctrines”(2002)4:1American Law and Economics Review88-115,at 110-13,emphasizingefficiencyconcernsratherthanfairnessconsiderations.

19 See,forexample,JoelSlemrod,“MyBeautifulTaxReform,”inAlan J.AuerbachandKevin A.Hassett,eds.,Toward Fundamental Tax Reform(Washington,DC:AmericanEnterpriseInstitute,2005),135-48,at 136,arguingthattherearebetterwaystoachievespendingrestraintthan“purposelyrunninganinefficienttaxsystem”;andWeisbach,“AnEconomicAnalysisofAnti-Tax-AvoidanceDoctrines,”supranote 18,at 111,arguingthattaxavoidanceis“oftenaninefficientmethodofrepealingthetax.”

20 SeeDiscussion Paper on Tax Avoidance,supranote 16. 21 PeterGroenewegen,“DistributionalandAllocationalEffectsofTaxAvoidance,”inDavid

Collins,ed.,Tax Avoidance and the Economy(Sydney:AustralianTaxResearchFoundation,1984),at 23.


subsequentdefenceof impermissibletaxavoidanceschemes.”22Moreover,whererevenue losses lead to a reduction inworthwhile government expenditures, aninappropriate increase in government debt, or the collection of revenues fromother,lessefficienttaxes,taxavoidancecanresultinindirectorsecond-ordereffi-ciencycostsaswellasdirectefficiencycosts.23Ineachcase,anti-avoidancemeasurescanhelpreduce theseefficiencycostsbydeterringeconomicallywasteful invest-mentsintax-avoidanceactivitiesandimprovingtheefficiencyofthetaxasameansofraisingrevenue.24Forthisreason,consequentialistargumentsforgeneralanti-avoidancerulesanddoctrinestypicallyemphasizeefficiencyconsiderationsaswellasrevenueconcerns.25

Athirdconsequentialistargumentforanti-avoidancemeasuressuchasGAARs concernsthedistributionalimpactoftaxavoidance,whichisaffectednotonlybythereducedtaxesthatarepaidbytaxpayerswhoarewillingandabletoavoidtaxes,butalsobylowergovernmentspending,increasedgovernmentborrowing,and/orincreasedtaxespaidbyothertaxpayerswhoarelesswillingorabletoavoidtaxes.26 Totheextentthattaxandspendingpoliciesareintendedtoaccomplishameasureofdistributivefairness,taxavoidanceunderminesthesedistributivegoals,resultinginanunfairshiftingofthetaxburden(typicallytolessaffluentandlessmobiletax-payers)anda lessequitabledistributionofeconomicresourcesmoregenerally.27 For this reason, as Professor Edgar also emphasizes, the adverse impact of taxavoidanceon“thepatternofincome/wealthdistribution”isanadditionaljustifica-tionforastatutoryGAAR.28

22 Discussion Paper on Tax Avoidance,supranote 16,at 11-12,citingJoelSlemrodandShlomoYitzhaki,“TheCostofTaxationandTheMarginalEfficiencyCostofFunds”(1996)43:1International Monetary Fund Staff Papers172-98.

23 AsProfessorEdgarexplains,wheretaxavoidanceinvolvestheimperfectsubstitutionofalower-taxedtransactionorarrangementforahigher-taxedalternative,theeconomiccostsofthisbehaviourarebothdirectandindirect;wherealower-taxedtransactionorarrangementisaperfectsubstituteforthehigher-taxedalternative,ontheotherhand,first-ordercostsareabsentandtheeconomiccostsoftaxavoidanceinvolveonlysecond-ordercostsattributabletoreducedgovernmentexpendituresorthecollectionofrevenuesfromlessefficienttaxes.Edgar,“BuildingaBetterGAAR,”supranote 12,at 842-51.

24 See,forexample,Weisbach,“AnEconomicAnalysisofAnti-Tax-AvoidanceDoctrines,”supranote 18,at 93,explainingthatanti-avoidancedoctrinesreducetheabilityofthetaxpayertoshiftintotax-avoidanceactivities,therebyreducingthemarginalelasticityofthetaxandimprovingitsefficiencyasamethodofraisingrevenue.

25 See,forexample,DavidA.Weisbach,“TenTruthsAboutTaxShelters”(2002)55:2Tax Law Review215-54,at 222-25,analogizingtaxplanningtoanegativeexternalitythathasnosocialbenefit;andEdgar,“BuildingaBetterGAAR,”supranote 12,at 853,whoalsoarguesthattaxavoidancehasthecharacteristicsofanegativeexternality.

26 See,forexample,Québec,FinanceQuébec,Working Paper Aggressive Tax Planning(Québec:FinanceQuébec,January 2009),at 21(hereinreferredtoasAggressive Tax Planning).

27 See,forexample,ReuvenS.Avi-Yonah,“Globalization,TaxCompetitionandtheFiscalCrisisoftheWelfareState”(2000)113:7Harvard Law Review1573-1676,at 1578.

28 Edgar,“BuildingaBetterGAAR,”supranote 12,at 852.


Anotherconsequentialistargumentforanti-avoidancemeasuressuchasGAARs isthecorrosiveeffectthattaxavoidancecanhaveontaxcompliancegenerally.29AsDavidWeisbachexplains,totheextentthatsocialnormsplayanimportantroleintaxpayers’voluntarycompliancewithtaxlaws,suchthat“whetheryourneighborpaystaxesaffectswhetheryoupaytaxes,”theavoidanceofsometaxesbysometaxpayerscouldeasilyleadtotheavoidanceofmanytaxesbymanytaxpayers.30Asaresult,astheQuebecDepartmentofFinanceobserves,“[l]ikeaviciouscircle,theperceivedunfairnessandinjusticeinsuchasystemaresuchastodiscourage. . .taxpayerstocomplywiththelaw,andconsequently,increasethechancesofdamagingtheinteg-rityofthesystem.”31Forthisreason,Weisbachregardsreducedtaxcomplianceasthe“mostimportant”costoftaxavoidance,justifyinganti-avoidancemeasuresasanecessaryresponse.32

Thattheseconsequentialistconsiderationsmayjustifymeasurestolimittaxavoid-ance,however,doesnotexplainwhyanti-avoidancemeasuresshouldincludegeneralanti-avoidancerulesorprinciplesthatapplytotransactionsandarrangementsafterthe fact, as opposed todetailed legislation and specific anti-avoidance rules thatreduceoreliminateopportunitiesfortaxavoidanceinadvance.Indeed,totheextentthattaxavoidancedependsontheexistenceofgapsandinconsistenciesintaxlegis-lation, the minimization of these gaps and inconsistences through structuralreformsispresumablyamoreeffectivepolicyresponsethanrelianceonaGAAR.33 Aswell,whereparticularavoidancestrategiesareeasilyanticipated,specificanti-avoidancerulesaimedatthesestrategiesareoftenmoreeffectivethanaGAAR.

Intherealworld,however,alltaxsystemshavegapsandinconsistencies,andthecomplexityoftaxlegislationandthetransactionsandarrangementstowhichitappliesmakesitvirtuallyimpossibletoanticipateandforecloseallpossibleavoidancetech-niques before they are deployed.Although gaps and inconsistenciesmay reflectpoortaxpolicydecisions,theyarealsotheinevitableconsequenceofhavingtorelyonlegalconceptsandproxiestomeasureeconomicoutcomessuchas incomeor

29 See,forexample,StatementofHaroldR.Handler,onbehalfoftheTaxSection,NewYorkStateBarAssociation,beforetheCommitteeonFinance(27 April1999),citedinUnitedStates,DepartmentoftheTreasury,The Problem of Corporate Tax Shelters—Discussion, Analysis and Legislative Proposals(Washington,DC:DepartmentoftheTreasury,July 1999),at 3.

30 See,forexample,Weisbach,“AnEconomicAnalysisofAnti-Tax-AvoidanceDoctrines,”supranote 18,at 111.Forausefulintroductiontothetheoreticalandempiricalliteratureontheeffectof“taxmorale”ontaxcompliance,seeBennoTorgler,Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis(Cheltenham,UK:EdwardElgar,2007).

31 FinanceQuébec,Aggressive Tax Planning,supranote 26,at 21.

32 Weisbach,“AnEconomicAnalysisofAnti-Tax-AvoidanceDoctrines,”supranote 18,at 111.

33 See,forexample,GraemeS.Cooper,“InternationalExperiencewithGeneralAnti-AvoidanceRules”(2001)54:1SMU Law Review83-130,at 85,explainingthataGAARis“implausibleasasolutiontostructuralproblemsinthetaxsystem,anditisinappropriateasameansofdealingwithmurkylinesandfuzzycategoriesthataredrawninthetextof[tax]law.”


consumptionthataredifficulttodefineperfectlyandobserveaccurately,34andtheyalsoresult fromlegitimateconsiderations in thedesignofanytaxsystemsuchasreducingcomplexity,accommodatingliquidityconcerns,promotingsocialandeco-nomic policy objectives, and recognizing different tax policy choices made bydifferent jurisdictions.35 In addition, even where gaps and inconsistencies resultfrom poor tax policy choices, these policies are often difficult or impossible tochangeonaccountofpoliticalconsiderationsthatnecessarilyshapetherealworldoftaxpolicymaking.36

Finally,sinceitisimpossibletoforeseeandpreventalltaxavoidancebeforeitoccurs,theeffectivenessofdetailedlegislationandspecificanti-avoidancerulesinreducingtaxavoidanceisnecessarilylimited,37unlessthislegislationweretoapplyretroactively,whichwouldmaketaxrulesgrosslyunpredictableandundermineim-portantvaluesassociatedwiththeruleoflaw.38Aswell,evenifpolicymakerscouldanticipate all potential tax-avoidance strategies, the formulation of specific anti-avoidancerulestoaddressallofthesestrategieswouldbeenormouslycostlyandwouldgreatly increasethe lengthandcomplexityoftax legislation,39 therebyin-creasingthecostsoftaxadministrationandcomplianceaswellasthelikelihoodofadditionalavoidanceopportunitiesattributabletothis“legislativelayering.”40For

34 See,forexample,Weisbach,“AnEconomicAnalysisofAnti-Tax-AvoidanceDoctrines,”supranote 18,at 91,referring,forexample,totherealizationrequirementforrecognizingtaxableincome.

35 ChrisEvans,“ContainingTaxAvoidance:Anti-AvoidanceStrategies,”inJohn G.HeadandRichardKrever,eds.,Tax Reform in the 21st Century, A Volume in Memory of Richard Musgrave (AlphenaandenRijn,theNetherlands:KluwerLawInternational,2009),529-60,at 536.

36 See,forexample,ClaireCrawfordandJudithFreedman,“SmallBusinessTaxation,”inJamesMirrlees,StuartAdam,TimBesley,RichardBlundell,StephenBond,RobertChote,MalcolmGammie,PaulJohnson,GarethMyles,andJamesPoterba,eds.,Dimensions of Tax Design: The Mirrlees Review(Oxford:OxfordUniversityPress,2010),1028-99,at 1086.ForadiscussionintheCanadiancontext,seeDavidG.Duff,“IncomeTaxationofSmallBusiness:TowardSimplicity,NeutralityandCoherence,”inThe Dynamics of Taxation,supranote 8,chapter4.

37 See,forexample,DavidA.Dodge,“ANewandMoreCoherentApproachtoTaxAvoidance”(1988)36:1Canadian Tax Journal1-22,at 8.

38 Forabriefdiscussionofefficiencyandfairnessargumentsagainstretroactivetaxlegislation,seeBenjaminAlarie,“RetroactivityandtheGeneralAnti-AvoidanceRule,”inTax Avoidance in Canada After Canada Trustco and Mathew,supranote 12,197-219,at 215-217.

39 See,forexample,StanleyS.Surrey,“ComplexityandtheInternalRevenueCode:TheProblemoftheManagementofTaxDetail”(1969)34:4Law and Contemporary Problems 673-710,at 707,note 31;andCooper,supranote 33,at 95,arguingthat“continuingdesigntinkeringtosurroundindividualprovisionswithfurthersupportwillmakethelegislationtoodetailedandperhapsultimatelylesssecure.”

40 ChrisEvans,“TheBattleContinues:RecentAustralianExperiencewithStatutoryAvoidanceandDisclosureRules,”inJudithFreedman,ed.,Beyond Boundaries: Developing Approaches to Tax Avoidance and Risk Management(Oxford:OxfordUniversityCentreforBusinessTaxation,2008),37-46,at 43.


thesereasons,asWeisbachconcludes,anoptimalapproachtopreventingtaxavoid-anceislikelytoincludebothspecificanti-avoidancerulestheapplicationofwhichisdefinedex anteandgeneralanti-avoidancerulesanddoctrinesbasedonabroadstandardtheapplicationofwhichisdeterminedex post.41

Non-Consequentialist Arguments

Inadditiontotheseconsequentialistarguments,anotherrationaleforgeneralanti-avoidancerulesandprinciplesemphasizeslegislativeintentandtheintegrityoftheprovisionsthatcouldotherwisebecircumventedbytransactionsorarrangementsthatdefeattheobjectorpurposeofthelaw.AccordingtoJudithFreedman,forexample,thekeyfunctionofaGAARis“togivefulleffecttoparliamentaryintentionandpreventthefrustrationofspecificlegislation.”42Similarly,theAaronsonReportthatrecommendedaGAARfortheUnitedKingdomconcludedthatsuchaprovi-sionwould“[f ]irstandforemost . . .deter(and,wheredeterrencefails,counteract)contrivedandartificialschemeswhicharewidelyregardedasanintolerableattackontheintegrityoftheUK’staxregime . . .[and]makeamockeryofthewillofPar-liament.”43 As a result, as DavidWeisbach himself acknowledges, the essentialfunctionofanti-avoidancerulesisnottomakethetaxsystemmoreefficient,but“toensurethatdulyenactedtaxesarecollected.”44

UnlikeotherargumentsforGAARs,theseargumentsforastatutoryGAAR are non-consequentialistinthesensethattheyrefertonormativecriteriasuchaslegis-lativeintentandtheintegrityoftherelevantprovisionsthatareinternaltothelaw,notnormativegoals suchasefficiencyorequity thatareexternal to the lawandpursuedthroughthelaw.45Asaresult,theyappealtowhatLonFullerhascalledthe“innermoralityoflaw”ratherthanthe“substantiveaims”thatareincorporatedintolaw.46

ForFuller,theinnermoralityoflawsuggeststhatlawsshouldideallybegeneralintheirapplication,publiclypromulgated,non-retroactive,clearandcoherent,non-contradictory,capableofbeingobeyed,relativelystableovertime,andappliedin


42 JudithFreedman,“InterpretingTaxStatutes:TaxAvoidanceandtheIntentionofParliament”(2007)123:1Law Quarterly Review53-90,at 90.

43 GrahamAaronson,GAAR Study: A Study To Consider Whether a General Anti-Avoidance Rule Should Be Introduced into the UK Tax System(London:HMTreasury,November 2011)(herein referredtoas“theUKAaronsonreport),atparagraph 1.7(i)(https://webarchive .nationalarchives.gov.uk/20130402163458/http://www.hm-treasury.gov.uk/d/gaar_final _report_111111.pdf ).


45 SeegenerallyMarkP.Gergen,“TheCommonKnowledgeofTaxAbuse”(2001)54:1SMU Law Review131-47.

46 LonL.Fuller,The Morality of Law(NewHaven,CT:YaleUniversityPress,1969),at 42.


accordancewith the law as declared.47 Properly understood as aspirational aimsrather than categorical imperatives,48 these criteria express what Fuller calls an“idealoflegality”49accordingtowhich“asystemofrulesforgoverninghumancon-ductmustbeconstructedandadministeredifitistobeefficaciousandatthesametimeremainwhatitpurportstobe.”50Forthisreason,theyarewidelyregardedascoreconstituentsoftheruleoflawandnecessaryprerequisitestoindividualfree-domandhumandignity.51

Fromthisperspective,itisoftenarguedthatgeneralanti-avoidancerulesandprinciples contradict the rule of law because they rely on vague and uncertainstandards to distinguish between unacceptable tax avoidance and legitimate taxminimization.52Arelatedconcernisthattheapplicationofthesestandardsisdeter-minedretrospectivelyafteran impugnedtransactionorarrangementhasalreadyoccurred,makingitdifficultfortaxpayerstoplantheiraffairswithcertaintyastothetaxesthatthesetransactionsorarrangementswillattract.

Oneresponsetotheseobjectionsisthatvaluesofindividualfreedomandhumandignitymustbebalancedagainstothervaluessuchasfairnessandefficiency,suchthatgeneralanti-avoidancerulesandprinciplesmaybejustifiedeveniftheycontra-dicttheruleoflaw.53Morepersuasively,Ibelieve,non-consequentialistarguments

47 Ibid.,at 46-91.

48 Ibid.,at 104,describingtheinnermoralityoflawas“chieflyamoralityofaspiration,ratherthanduty.”

49 Ibid.,at 147.

50 Ibid.,at 97.

51 See,forexample,JosephRaz,“TheRuleofLawandItsVirtue”(1977)93:2Law Quarterly Review195-211,at 204,explainingthattheruleoflawcontributestoindividualfreedombyallowingpersonstomakeplansandactuponthemwithoutsubsequentlegaldisruption,therebyrespectinghumandignitybyrespectingtherightsofindividualstoshapetheirownfutures.

52 See,forexample,RebeccaPrebbleandJohnPrebble,“DoestheUseofGeneralAnti-AvoidanceRulesToCombatTaxAvoidanceBreachPrinciplesoftheRuleofLaw?AComparativeStudy”(2010)55:21Saint Louis University Law Journal21-45,at 28-30;andColinMasters,“IsThereaNeedforGeneralAnti-AvoidanceLegislationintheUnitedKingdom?”[1994]no. 6British Tax Review647-73,at 671,arguingthataGAAR“violatesperhapsthemostimportantandfundamentalprincipleoftaxlaw:thatthetaxlegislationmustimposetaxinclearandunambiguoustermsandthatapersonmustnotbetaxedunlesshecomeswithintheletterofthelaw.”

53 PrebbleandPrebble,supranote 52,at 38-41.Indeed,itissometimesarguedthattheuncertaintycreatedbytheserulesandprinciplesisapositivevirtue,sinceitdiscouragestaxpayersfromengaginginaggressivetaxplanning.See,forexample,ErikM. Jensen,“LegislativeandRegulatoryResponsestoTaxAvoidance:ExplicatingandEvaluatingtheAlternatives”(2012)57:1Saint Louis University Law Journal1-58,at 38,suggestingthat“someuncertaintyisvaluableforthetaxsystem”since“itdeterstaxpayersfromgettingtooclosetoabusiveterritory.”AlthoughsomeuncertaintymaybeinevitablewithaGAAR,introducing


for GAARssuggestthattheserules,whenproperlydesigned,arenotonlycompatiblewiththeruleoflawbutactuallysupportthe“idealoflegality”towhichtheruleoflawaspiresbydiscouragingandcounteracting transactionsorarrangements thatunderminetheintegrityoftherelevantprovisionsandcontradicttheirobjectsandpurposes.Forthisreason,asMarkGergenexplains,althoughthestandardsembodiedin general anti-avoidance rules and principles are less predictable than detailedrules,54andalthoughtheirapplicationisnecessarilydeterminedex postratherthanex ante,55they“mediatebetweenourdesirethattaxlawbecoherentandprincipledandourdesirethatitberule-bound”andarethus“aproductofacommitmenttolawbyimperfectrules”ratherthan“anabnegationoftheruleoflaw.”56Inordertobestadvancethisidealoflegality,however,itisimportantthataGAARshouldbedesignedinamannerthatisconsistentwiththeprinciplesonwhichthisidealisbased.57Thenextpartofthispaperisdirectedtowardthistask.

DESIGN

Althoughtherationaleforageneralanti-avoidanceruleorprinciplemaybebasedonconsequentialistornon-consequentialistarguments,themostpersuasiverationaleundoubtedly includes both. As I explain below, however, non-consequentialistconsiderationsareparamountwhenitcomestothewayinwhichtheserulesandprinciplesareproperlyexpressedinlaw.

Codification

The first issue to address in formulating a general standard to discourage andcounteractunacceptabletaxavoidanceiswhetherthisstandardshouldbejudiciallydefinedorcodifiedintheformofanexplicitrule.Althoughthisquestionisobviouslyacademic in jurisdictions likeCanada,wherecourtshaverefused toadoptbroadanti-avoidanceprinciplesordoctrines,58therearegoodreasonswhythesestandardsarebestcodifiedindomestictaxlegislationandinternationaltaxtreatiesinsteadofbeinglefttojudicialformulation.

anddesigningaGAARinordertodeliberatelycreatelegaluncertaintydiminishesthevalueoflegalcertaintyandunderminestheruleoflaw.Inaddition,thereareotherandbetterwaystodiscourageaggressivetaxplanning,suchasdisclosurerulesandpromoterpenalties,whichcanbecarefullydesignedtoensuretheirconsistencywiththeruleoflaw.

54 Gergen,supranote 45,at 137.

55 Ibid.,at 143.

56 Ibid.,at 131.

57 See,generally,ChrisAtkinson,“GeneralAnti-AvoidanceRules:ExploringtheBalanceBetweentheTaxpayer’sNeedforCertaintyandtheGovernment’sNeedToPreventTaxAvoidance”(2012)14:1Journal of Australian Taxation1-56.

58 Stubart Investments Ltd. v. The Queen,[1984]1SCR536.


First, as Judith Freedman has argued, in jurisdictions like Canada and theUnitedKingdom,inwhichcourtshavetraditionallyheldthattaxpayershaveaquasi-constitutionalrighttoarrangetheiraffairsinordertominimizetax,59astatutory(ortreaty-based)general anti-avoidance ruleorprinciple affirms the “constitutionalsourceandauthority”ofthisstandardasalegitimateoverlayonmorespecifictaxprovisions.60Second,asopposed to judiciallydevelopedprinciplesanddoctrinesthatareinevitablyopen-endedandchangeable,61explicitstatutoryortreatyrulescanprovideaclearandconsistentframeworkforapplyingageneralanti-avoidancestan-dard.62Therefore,astheUKAaronsonReportconcluded,ageneralanti-avoidanceruleorprinciple“shouldbeimposedbylegislation”inordertobe“consistentwiththeruleoflaw.”63

Forthesereasons,itisnotsurprisingthatseveraljurisdictionshaveintroducedstatutoryGAARs,andthatothershavecodifiedjudiciallydevelopedanti-avoidanceprinciplesanddoctrines.64NorisitsurprisingthattheOECDhascodifiedtheanti-abuseprinciplethatwasaddedtothecommentaryontheOECDmodeltaxconventionin2003byadding thePPT to themodelconventionand theMLI.65Although therationaleforcodificationmayinvolveconsequentialistconsiderationssuchasthe ef-ficiencyofastatutoryruleoritsimpactontaxcompliance,theprimaryreasonforcodification involves non-consequential considerations regarding legitimacy andlegalclarityandconsistency.

59 See,forexample,Inland Revenue Commissioners v. Westminster (Duke),[1936]AC1(HL)(herein referredtoas“Duke of Westminster”).

60 Freedman,supranote 42,at 63.

61 See,forexample,thereviewofthepre-GAARtaxavoidancejurisprudenceintheUnitedKingdominFreedman,supranote 42,at 55-70;thereviewoftheEuropeanCourtofJustice’santi-abusejurisprudenceinde la Feria,“EUGeneralAnti-(Tax)AvoidanceMechanisms,”supranote 8;andJenson,supranote 53,at 24,notingthata“compelling”argumentforcodificationoftheeconomicsubstancedoctrineintheUnitedStatesisthatcourts“hadnotbeenconsistentintheirunderstandingofthecomponentsofthatdoctrine.”

62 Freedman,supranote 42,at 70.

63 UKAaronsonreport,supranote 43,atparagraph 3.4.

64 SeeArticle6(1)ofCouncilDirective2016/1164/EU,supranote 8,whichcodifiestheprinciplesestablishedinleadingjudgmentsoftheEuropeanCourtofJustice;andsection 7701(o)oftheInternalRevenueCodeof1986,asamended,whichcodifiestheUSeconomicsubstancedoctrine.ForusefulreviewsoftheUSeconomicsubstancedoctrine,arguingitshouldmoreclearlyincludeareferencetotheobjectandpurposeofthelegislation,seeLeandraLederman,“W(h)itherEconomicSubstance?”(2010)95:2Iowa Law Review389-444;andOrlySulami,“TaxAbuse—LessonsfromAbroad”(2012)65:3SMU Law Review555-91.

65 Seearticle 29(9)oftheOECDmodelconventionandarticle 7(1)oftheMLI,whicharebasedonthe“guidingprinciple”setoutinparagraph 9.6ofthecommentaryonarticle 1ofthe2003OECDmodelconvention.


Subjective and Objective Elements

Asnotedearlier,theCanadianGAAR and most modern GAARsincludeasubjectiveelementconcerningthepurposeofthetransactionorarrangementthatresultsinataxbenefit,andanobjectiveelementregardingthemisuseorabuseoftherelevantprovisions.ThefollowingdiscussionexplainstheroleofeachelementwithinanidealGAAR, theway inwhicheach requirement shouldbeunderstood, and theextent towhich concepts of artificiality and economic substance are relevant tothe interpretationandapplicationoftheserequirements.

Purpose TestItisnotsurprisingthataGAARwouldincludeapurposetest,requiringthatatrans-actionorarrangementthatissubjecttotherulehavebeenundertakenorarrangedinordertoobtainataxbenefit.Afterall,theveryconceptof“avoidance”involvesapurposefulactto“getaround”or“getoutof”something.66Synonymsfortheword“avoid” include “circumvent,” “dodge,” “duck,” “sidestep,” “elude,” “escape,”“shun,”and“eschew”67—allofwhichinvolveanelementofpurposeonthepartofthepersonorpersonsparticipatinginavoidance.Asaresult,astheCartercommis-sionobserved,“motivewouldseemtobeanessentialelementoftaxavoidance.”68

According toProfessorEdgar,apurpose test is integral to theefficiencyofaGAAR,prohibitingtransactionsandarrangementsforwhichmarginalsocialcostsintermsofrevenuelosses,efficiencycosts,anddistributionalimpactsexceedmarginalprivatebenefitsintermsoftaxesreduced.69Indeed,onthe“plausibleassumption”thatthemarginalsocialcostsoftaxavoidancealwaysequalorexceedmarginalpri-vatebenefits,70Edgararguedthat“thereisnoleveloftax-avoidancebehaviorthatpolicymakersshouldaccept, . . .andthepolicygoalmustbetheeliminationofalltaxavoidance”71—subjecttoalimitedexceptionfortransactionsthatareexplicitlyencouragedthroughtax-incentiveprovisions.72Onthisaccount,heconcludedthat

66 MicrosoftWordThesaurus.

67 Ibid.

68 Canada,Report of the Royal Commission on Taxation,vol. 3(Ottawa:Queen’sPrinter,1966)(hereinreferredtoas“theCartercommission”),at 537-38,explainingthatataxpayer“whoadoptsoneofseveralpossiblecoursesbecauseonewillsavehimthemosttaxmustbedistinguishedfromthetaxpayerwhoadoptsthesamecourseforbusinessorpersonalreasons.”Ireturntothedistinctionbetweentheconceptsofmotiveandpurposeintextaccompanyinginfranotes 85-89.

69 Edgar,“BuildingaBetterGAAR,”supranote 12,at 852-71.

70 Thisassumptionispremisedonthefurtherassumptionthattaxavoidanceisnotaneffectivewaytocontrolexcessivegovernmentspendingorpromoteamoreefficienttaxsystem.Supranote 19andaccompanyingtext.


72 Ibid.,at 881.


a GAARbasedonapurposetestrepresents“theexpressionofabehavioralprohibi-tionthattargetstheentirerangeoftax-avoidancetransactionswhoseconsequentialattributesjustifyprohibition.”73

Incontrast,othershavesuggestedthat thepurposeforwhichatransaction isundertakenorarrangedisirrelevanttohowitshouldbetreatedfortaxpurposes.74 AccordingtoJudithFreedman,forexample,iftaxpayersaregenerallyentitledtoarrangetheiraffairs inordertominimizetax,75“therelevanceof [thetaxpayer’s]purpose is hard to discern, since it can be argued that it is the transaction thatshouldbetaxed,andthewayinwhichsimilartransactionsaretaxedshouldnotvarywiththepurposeofthetaxpayer.”76MichaelLangarrivesatasimilarconclusioninadifferentway,arguingthatasubjectiveelementisirrelevanttotheapplicationoftaxlegislationif it isproperlyinterpretedinateleologicalmannerinaccordancewithitsobjectandpurpose.77

Inresponsetothesearguments,onemightbeginbynotingthatmanytaxprovi-sionsmakethepurposeofatransactionorarrangementanexplicitrequirementforaparticulartaxresult.78Inaddition,evenifaprovisiondoesnotincludeanexplicitpurposetest,itisarguablethatthepurposeofatransactionorarrangementmayberelevanttotheobjectandpurposeoftheprovisionatissue,andshouldthere-forebetakenintoaccountindeterminingwhetheritapplies.79Moregenerally,if

73 Ibid.,at 873.Sincethisformulationwouldincludetax-inducedchangesinwhateconomistscall“realeconomicbehaviour”(suchasthedecisiontoworkfewerhoursortoconsumeratherthanspend)aswellastax-inducedresponsestostructuralfeaturesoftaxlawthataccorddifferenttaxoutcomestodifferentlegalrelationships(forexample,employeeversusindependentcontractor)ororganizationalforms(forexample,incorporatedorunincorporatedenterprises),itappearstobeoverbroad.However,EdgarwouldexcludethesebehaviouraladjustmentsfromthescopeofaGAARontheconsequentialistgroundsthattheinformationalrequirementstodeterminetheefficiencyofthesebehaviouralresponsestotaxationisbeyondtheinstitutionalcompetenceofthejudiciary.Ibid.,at 851.

74 See,forexample,WalterJ.Blum,“Motive,Intent,andPurposeinFederalIncomeTaxation”(1967)34:3University of Chicago Law Review485-544;andAlanGunn,“TaxAvoidance”(1978)76:5Michigan Law Review733-67,at 765,concludingthat“thequestionwhetherparticularconductwastax-motivatedshouldbeirrelevanttothedecisionwhetherthatconductshouldbetaxedinacertainway.”

75 See,forexample,Duke of Westminster,supranote 59. 76 Freedman,“TheAnatomyofTaxAvoidanceCounteraction,”supranote 8,at 374. 77 Lang,supranote 11,at 449. 78 ObviousexamplesintheITAincludeparagraph 18(1)(a),whichlimitsthedeductionofan

outlayorexpenseincomputingataxpayer’sincomefromabusinessorproperty“totheextentthatitwasmadeorincurredbythetaxpayerforthepurposeofgainingorproducingincomefromthebusinessorproperty”andtherequirementinsubparagraph 20(1)(c)(i)thatinterestonborrowedmoneymustbe“usedforthepurposeofearningincomefromabusinessorproperty”inordertobedeductibleincomputingthetaxpayer’sincomefromthisbusinessor property.

79 ThisistheinterpretiveapproachthattheUSSupremeCourtadoptedinGregory v. Helvering, 293US465(1935),concludingthatthe“plainintent”ofaprovisionpermittingatax-free


oneassumesthattaxprovisionsaretypicallyintendedtoapplytotransactionsandarrangementsthatarecarriedoutforbonafidecommercialorpersonalpurposes,not to transactionsorarrangements thatareundertakenorarranged inorder toobtaintaxbenefits,apurposetestmaybeanintegralaspectofateleologicalapproachtotheinterpretationoftaxlegislationandtaxtreatiesgenerally.80Onthisaccount,therefore,aGAARthatincludesapurposerequirementcouldbeconstruedasanex-plicitexpressionofateleologicalapproachtotheinterpretationoftaxlawasawhole.

At thesametime,althoughthemodernapproachto the interpretationof taxprovisionsrequiresthattheybeconstruedin light oftheirobjectsandpurposes,81 thisinterpretiveapproachdoesnotallowcourtstorelyontheseobjectsandpurposesto overridethetextoftheseprovisionsoncetheyareproperlyconstruedinlightoftheirobjectsandpurposes.82Onthecontrary,asDenisWeberhasexplainedinthecontext of EUlaw,oncethemeaningofaprovisionisproperlyconstruedunderordinarymethodsofinterpretation,principlesoflegalityandlegalcertaintypro-hibit“thesettingasideoflegislation. . .merelybyinvokingthefactthatthe[tax]advantageisinconflictwiththeobjectiveofthelegislation.”83Whereatransactionorarrangementisundertakenorarrangedinordertoobtainataxbenefit,ontheother hand, these principles are legitimately superseded by a general anti-abuseprinciple,andtheobjectandpurposeoftherelevantprovisionsmaybereliedupontosupplanttheirmeaningasordinarilyconstrued.84Asaresult,whetherornotapurpose

corporatereorganizationwaslimitedtopermittingthereorganizationof“corporatebusiness,”not“anoperationhavingnobusinessorcorporatepurpose.”Ibid.,at 469.

80 ThisisthebroadersignificanceofthedecisioninGregory v. Helvering,ibid.,andthefoundationofageneral“businesspurposetest”inUStaxlaw.See,forexample,Bazley v. CIR,331US737(1947);andGoldstein v. CIR,364F. 2d734,at 740(2d Cir.1966);certioraridenied385US1005(1967).See,forexample,Brian J.Arnold,“InPraiseoftheBusinessPurposeTest,”in Report of Proceedings of the Thirty-Ninth Tax Conference,1987ConferenceReport(Toronto:CanadianTaxFoundation,1988),10:1-34.

81 See,forexample,Stubart,supranote 58,at 578,citingpage 87ofE.A.Driedger,Construction of Statutes,2d ed.(Toronto:Butterworths,1983),accordingtowhom“thewordsofanActaretobereadintheirentirecontextandintheirgrammaticalandordinarysenseharmoniouslywiththeschemeoftheAct,theobjectoftheAct,andtheintentionofParliament”;andarticle 31(1)oftheViennaConventionontheLawofTreaties,signedatViennaonMay 23,1969,UN doc.A/Conf.39/27,providingthatatreaty“shallbeinterpretedingoodfaithinaccordancewiththeordinarymeaningtobegiventothetermsofthetreatyintheircontextandinlightofitsobjectandpurpose.”

82 See,forexample,LeonardHoffman,“TaxAvoidance”[2005]no. 2British Tax Review197-206,at 205,explainingthat“[i]tisonethingtogivethestatuteapurposiveconstruction.Itisanothertorectifythetermsofhighlyprescriptivelegislationinordertoincludeprovisionswhichmighthavebeenincludedbutarenotactuallythere.”

83 DennisWeber,“AbuseofLawintheContextofIndirectTaxation:WhyWeNeedtheSubjectiveIntentionTest,WhenIsCombatingAbuseanObligationandOtherComments,”inProhibition of Abuse of Law,supranote 8,395-406,at 398(emphasisinoriginal).

84 Ireturntothispointattextaccompanyinginfranote 144.


testcontributestotheefficiencyofaGAAR,itisanessentialelementofageneralanti-avoidanceruleorprinciplethatiscompatiblewiththenon-consequentialistidealoflegality.

Fromthisperspective,itistemptingtoregardthesubjectiveelementofaGAAR asthetaxlawequivalentofthemens rearequirementincriminallaw.AsGraemeCooperexplains,however,thepurposetestinaGAARisverydifferentfromtheintentionrequirementincriminallaw,whichdependsonaperson’sconsciousmentalstate,evenifthismentalstatemustbeinferredthroughexternalindicia.85Indeed,althoughtheCartercommissionreferredto“motive”asanessentialelementoftaxavoidance,86itisnotablethatmodernGAARsusetheword“purpose,”whichempha-sizestheaimorobjecttobeattainedbyaparticularaction,87ratherthan“motive,”whichreferstothereasonswhyapersonengagesinaparticularaction.88Aswell,modern GAARsgenerallyassessthepurposesforwhichtransactionsareundertakenorarrangedobjectively(thatis,accordingtoastandardofreasonableness),notsub-jectively(accordingtothespecificpurposesofthepersonsinvolved).Asaresult,theso-calledsubjectiveelementofaGAARproperlyconsidersthepurposesthatmayreasonablybeattributedtothetransactionorarrangement,notthesubjectivein-tentionsofthepersonorpersonswhocarryitout.89

AccordingtotheCanadianGAAR,forexample,theprovisiondoesnotapplytotransactions that “may reasonably be considered to have been undertaken or ar-ranged. . .forbona fidepurposesotherthantoobtainataxbenefit.”90Asaresult,asBrianArnoldand JamesWilsonexplain, theprovisionasks “notwhatwas in thetaxpayer’smindbutwhatareasonabletaxpayerwouldhaveconsideredtobethepur-poseofthetransaction.”91SimilarlanguageappearsintheUK GAAR,92aswellasthePPT,93suggestingthatthepurposetestsintheseprovisionsmustalsobeassessed

85 GraemeCooper,“TheRoleandMeaningof‘Purpose’inStatutoryGAARs,”inNigarHashimzadeandYuliyaEpifantseva,eds.,The Routledge Companion to Tax Avoidance Research (Abingdon,UK:Routledge,2017),78-96,at 86.

86 Cartercommission,supranote 68.

87 SeeConcise Oxford Dictionary,7th ed.,defining“purpose”as“objecttobeattained.”

88 Ibid.,defining“motive”as“whatinducesapersontoact.”

89 Foracontraryview,seeDavidWeisbach,“TenTruthsAboutTaxShelters,”supranote 25,at 251-53,whoinmyviewwronglyequatesthepurposerequirementingeneralanti-avoidancerulesanddoctrineswiththeconceptsofmotiveandintent.

90 ITAsubsection 245(3).

91 BrianJ.ArnoldandJamesR.Wilson,“TheGeneralAnti-AvoidanceRule—Part 1”(1988)36:4Canadian Tax Journal829-87;and“. . . Part 2,”(1988)36:5Canadian Tax Journal1123-85,at 1369-1410,and1157.

92 UKGAAR,supranote 5,section 207(1).

93 Supranote 6.


objectively,byreferencetowhatareasonablepersonwouldconclude.94Australiancourtshaveadoptedanidenticalapproachevenintheabsenceofexplicitstatutorydirectiontothiseffect,concludingthatthepurposetestintheAustralianGAAR is tobeapplied“byanalysisofobjectivecriteriawithoutregardtotheactualpurposeormotive,ultimateorotherwise,oftherelevantschemeparticipants.”95 Here too, therefore,thepurposetestisassessedobjectively,byreferencetowhat“areasonableperson,whoimplementedtheactsactuallyundertakenbythetaxpayerandconfeder-ates,[would]havebeenseekingtoaccomplish.”96Inthisrespect,asGraemeCooperobserves,thepurposetestofaGAARoperatesmuchlikethe“reasonableperson”standardintortlaw.97

Althoughcourtsgenerallylookforobjectivemanifestationsofsubjectivepurposewhentheyarerequiredtoconsiderataxpayer’spurpose,98anobjectiveapproachisessentialforaGAAR,whichwouldberenderedlargelyineffectiveifpersonscouldrelyonassertionsofsubjectivenon-taxpurposestoescapeitsapplication.99Anob-jectiveassessmentofthepurposesforwhichatransactionisundertakenorarrangedisalsoconsistentwiththefactthatthefunctionofaGAARisnottoassignmoralculpabilitytothepersonsinvolvedinatax-avoidancetransaction,buttoensurethatthetransactionissubjecttotaxinaccordancewiththeobjectandpurposeoftherel-evant provisions.100 As a result, an objective approach to the application of thesubjectiveelementisnotonlyessentialtotheeffectivenessofaGAARbutalsocom-patiblewithnon-consequentialistconsiderationsassociatedwiththeruleoflaw.

Inadditiontothisobjectiveapproach,someGAARsrefertothepurposesofarrangements or transactions themselves,101 rather than the purposes for whichtransactionswereundertakenorarranged(asintheCanadianGAAR)102orthepur-poseofthepersonorpersonswhoenteredintoorcarriedoutthetransactions(asin

94 See,forexample,paragraph 179ofthecommentaryonarticle 29oftheOECDmodelconvention,statingthatthepurposesofanarrangementortransaction“mustbeobjectivelyconsidered.”

95 Orica Limited v. Commissioner of Taxation,[2015]FCA1399,atparagraph 19.

96 Cooper,“TheRoleandMeaningof‘Purpose’inStatutoryGAARs,”supranote 85,at 87.

97 Ibid.

98 See,forexample,Symes v. Canada,[1993]4SCR695,at 736,statingthatcourtsinthesecasesshouldnot“beguidedonlybyataxpayer’sstatements,ex post factoorotherwise,”butshouldinstead“lookforobjectivemanifestationsofpurpose”whichis“ultimatelyaquestionoffacttobedecidedwithdueregardforallofthecircumstances.”

99 Freedman,“TheAnatomyofTaxAvoidanceCounteraction,”supranote 8,at 375.

100 See,forexample,Copthorne,supranote 1,atparagraph 65,emphasizingthattheGAARshouldnotbeinterpretedas“implyingmoralopprobriumregardingtheactionsofataxpayertominimizetax.”

101 See,forexample,theUKGAAR,supranote 5;andthePPT,supranote 6.



theAustralianGAAR).103Althoughit isabsurdto imaginethatarrangementsortransactionscanhave theirownpurposesapart fromthoseof thepersonswhoarrangethemandcarrythemout,104thislanguagereaffirmstheobjectivenatureoftheinquiry,andensuresthattheGAARcanapplytoarrangementsandtransactionsthatarearrangedbypersons(suchastaxspecialists)otherthanthosewhoobtaintheresultingtaxbenefits,whomaythemselveshavelittleornoknowledgeofthesetaxbenefitsorhowtheyareobtained.105

SincetheeffectivenessofaGAARwouldbegreatlydiminishedifitweretoapplyonlytotransactionsorarrangementsthatareenteredintobypersonswhofullyappreciatetheresultingtaxbenefits,106anemphasisonthepurposeofthetrans-actionorarrangementmaybeuseful,thoughitwouldbeconceptuallymoreprecisetorefertothepurposesofthepersonsinvolvedinarrangingorcarryingoutthetransactionorarrangementorthepurposesforwhichthetransactionorarrange-mentwasundertakenorarranged(asintheCanadianGAAR).Althoughsomemightsuggest that itwouldbeunfair to impugn a transactionor arrangement that isenteredintobyapersonwhoisunawareofthepurposesofothers,107itisimportanttorecallthattheapplicationofaGAARdependsnotonataxpayer’smentalstateormoralculpabilitybutonanobjectiveassessmentthatthetransactionorarrange-mentitselfcanreasonablybeconsideredtohavebeenundertakenorarrangedinordertoobtainataxbenefit.Asaresult,theapplicationofaGAARto“innocent”taxpayersisnotonlynecessarytotheeffectivenessofaGAARbutalsojustifiable,giventhefunctionandeffectofaGAAR,which(torepeat)isnottoassignmoralculpabilitybuttoensurethattax-avoidancetransactionsorarrangementsaresub-jecttotaxinaccordancewiththeobjectandpurposeoftherelevantprovisions.

For this reason, moreover, several GAARs also include objective factors thatcourtsmayormusttakeintoaccountindeterminingthepurposesforwhichatrans-actionor arrangementwasundertakenor arranged.According to theAustralian

103 AustralianGAAR,supranote 4,section 177D(1).

104 See,forexample,Cooper,“TheRoleandMeaningof‘Purpose’inStatutoryGAARs,”supranote 85,at 88,observingthat“arrangementscannothavepurposes”andrejectingtheideathat“inanimatelegalconstructs”canhavepurposesas“linguisticnonsense.”NotwithstandingthereferencetothepurposesofanarrangementortransactioninthePPT,thecommentaryonthisprovisionintheOECDmodelconventionsupportstheconclusionthatarrangementscannothavepurposes,statingthatitisimportanttoconsider“theaimsandobjectsof all persons involvedinputtingthearrangementortransactioninplaceorbeingapartytoit”todeterminewhetherthePPTapplies.Seeparagraph 178ofthecommentaryonarticle 29oftheOECDmodelconvention(emphasisadded).

105 AsCooperexplains,forexample,“thetaxpayerwhoinvestsinamarketedtaxsheltermaywellbemotivatedexclusivelybythehighercommercialreturnbeingpromised,oblivioustothefactthattaxplaysanypartinhowitarises.”SeeCooper,“TheRoleandMeaningof‘Purpose’inStatutoryGAARs,”supranote 85,at 90.

106 Ibid.,at 88.

107 Ibid.


GAAR,forexample,thepurposetestistobeappliedhavingregardtoeightcon-siderations,including“themannerinwhichtheschemewascarriedout,”“theformand substance of the scheme,” and “the length of the period during which theschemewas carriedout.”108AsGraemeCooper explains, these factors generallyinvolve an elementof artificiality, including a lackof commercial substance andothercharacteristics that “are suggestiveof artifice.”109Although factors suchascommercialoreconomicsubstancearearguablymorerelevanttothemisuseandabuserequirementofaGAAR,110 theconceptofartificiality isconsistentwithanobjectiveapproachtothepurposerequirementinaGAAR—anattempt,asCooperstates, “to ground the GAAR in something observable about the features of thetransactionorstructure,anddefinitelymoreconcretethanamerestateofmind.”111 Indeed,itispreciselythisfunctionthattheconceptofartificialityservedinthelead-ingEuropeanCourtofJusticedecisionontheanti-abuseprinciple:asanobjectivefactor that supported thecourt’s conclusion that “theessential aimof the trans-actionsconcernedistoobtainataxadvantage.”112

Asisoftennoted,ofcourse,taxlawisitselfartificial,113andanelementofartifi-cialityisinherentinamultitudeofcommoncommercialdealings.114Asaresult,asJudithFreedmanemphasizes,“[a]rtificialityalonecannotbesaidtobeahallmarkof[tax]avoidancewhensomuchabouttax isartificial.”115So longas therelevanceof artificialityislimitedtothesubjectiveelementofaGAAR,however,artificialityaloneshouldnotcauseaGAARtoapply,butonlytoelicitafurtherinquiryintotheobjectiveelementof theGAARtodeterminewhethertheartificial transactionorarrangementcontradictstheobjectandpurposeoftherelevantprovisions.

While the Canadian GAAR does not explicitly refer to artificiality, the 1987Department of Finance white paper that introduced the rule stated that it was“intendedtopreventartificialtaxavoidancearrangements,”116andtheoriginaldraft

108 AustralianGAAR,supranote 4,sections 177(D)(2)(a),(b),and(c).


110 Seeinfranotes 150-159andaccompanyingtext.Asexplainedatinfranote 155,thesefactorshavebeenincorporatedintothepurposetestintheAustralianGAARbecauseitdoesnotcontainanexplicitmisuseorabusetest.


112 Halifax,supranote 8,atparagraph 75.

113 Gergen,supranote 45,at 144.

114 Cooper,“TheRoleandMeaningof‘Purpose’inStatutoryGAARs,”supranote 85,at 90,referringtosale-leasebackarrangements,repurchaseagreements,andfinancingleases.AnexcellentexampleintheCanadiancontextisabutterflyreorganization,which,asDavidDodgenotedwhentheGAARwasfirstenacted,ishighlyartificialbutexplicitlysanctionedbyparagraph 55(3)(b)oftheITA.Dodge,supranote 37,at 7.

115 Freedman,“DefiningTaxpayerResponsibility,”supranote 8,at 343.

116 Canada,DepartmentofFinance,Tax Reform 1987: Income Tax Reform(Ottawa:DepartmentofFinance,June 18,1987),at 129.


legislationincludedageneralinterpretiveprovisionindicatingthatthepurposeofGAARwas“tocounterartificialtaxavoidance.”117Thisinterpretiveprovisionwasdeletedfromthefinalversion,however,andreplacedbythemisuseorabuserequire-ment,whichhadnotappearedintheoriginaldraft.118Astheseniorassistantdeputyministeroffinancenotedatthetime,sincesomepre-GAARcaseshadinterpretedthewordartificialtomean“simulated”or“fictitious,”119areferencetoartificialitymighthavesuggestedthat“aparticularlyhighlevelofabuse”wasrequired.120Forthisreason,althoughsomejurisdictionsmightfinditusefulforaGAAR to refer to objectivefactorssuchasartificialityinordertoreinforcetheobjectivenatureofthepurposetest,thisseemsinadvisableintheCanadiancontext.Nonetheless,itcouldbeusefultoaddalistofobjectivefactorsthatareindicativeofartificiality,suchastheparticipationofaccommodatingparties,orthecreationandterminationofasingle-purposeentityorrelationshipwithinarelativelyshortperiodoftime,whichoftensuggestthatatransactionorarrangementwasundertakenorarrangedinordertoobtainataxbenefit.121

AfinalissuewithrespecttothepurposetestinaGAARconcernsthedegreetowhichataxpurposeisrequiredinordertosatisfythistestwhenatransactionorarrangementisundertakenorarrangedfortaxandnon-taxpurposes,asisgenerallythecasewithmosttransactionsandarrangements.122AlthoughtheCanadianGAAR excludestransactionsthatmayreasonablybeconsideredtohavebeenundertakenorarranged“primarily”forpurposesotherthantoobtainataxbenefit,123 some GAARs refertothe“sole”purposeofanarrangementortransaction,124whileothersreferonly

117 Ibid.,at 214.

118 ArnoldandWilson,“. . .Part2,”supranote 91,at 1163.

119 See,forexample,Spur Oil Ltd. v. The Queen,81DTC5168(FCA),at 5170,interpretingformersubsection 245(1)oftheITA,whichdisallowedadeduction“inrespectofadisbursementorexpensemadeorincurredinrespectofatransactionoroperationthat,ifallowed,wouldundulyorartificiallyreduce”ataxpayer’sincome.SeealsoDes Rosiers v. The Queen,75DTC5298(FCTD),suggestingthattheruleinformersubsection 245(1)wasnodifferentthanthejudicialshamdoctrine.

120 Dodge,supranote 37,at 7.

121 ForusefulexamplesintheCanadiancontext,considerthesurplus-strippingtransactionswithaccommodatingpartiesinMcNichol et al. v. The Queen,97DTC111(TCC)andRMM Canadian Enterprises Inc. v. The Queen,97DTC302(TCC);andthetreaty-shoppingtransactions in MIL (Investments) SA v. The Queen,2006TCC460;aff’d2007FCA236;Alta Energy Luxembourg SARL v. The Queen,2018TCC152;aff’d2020FCA43.

122 Althoughpurelytax-driventransactionsarerare,examplesmightincludesometransactionsthatareundertakeninordertoobtainataxbenefitintheformofadeduction,loss,ortaxcreditthatcanbeusedtoshelterotherincomefromtax—acategoryoftax-avoidancetransactionsthatProfessorEdgarcharacterizedas“tax-attributecreation”transactions.Seetextaccompanyinginfranote 168.


124 See,forexample,IncomeTaxAct58of1962,section 80A(hereinreferredtoas“theSouthAfricanGAAR”),whichreferstothe“soleormainpurpose”ofanavoidancearrangement.


to “the”purposeofthearrangementortransaction—whichisgenerallyinterpretedtomeanthe“dominant”purpose.125OtherGAARs(forexample,theUK GAARandthePPT)adoptalowerthresholdbasedon“oneoftheprincipalpurposes”ofthearrange-ment or transaction126—whichisgenerallyinterpretedasa“significant”or“important”purpose.127Asaresult,mostGAARsincludeasolepurposetest,aprimary(ordom-inant)purposetest,orasignificant(orimportant)purposetest.128

AccordingtoProfessorEdgar,theconsequentialistrationaleforaGAARfavoursa“predominantorprimarypurpose”testasa“targeteffectivestandard”that“includestheentirerangeofbehavioraladjustmentsthatarecharacteristicoftheconceptoftaxavoidanceinlaw.”129Althoughnotentirelyclear,theintuitionbehindthiscon-clusionappearstobethatthemarginalsocialcostsoftransactionsorarrangementsthatareprimarilytax-motivatedalwaysexceedtheirmarginalprivatebenefits,whilethemarginalprivatebenefitsoftransactionsandarrangementsthataremotivatedprimarilybynon-taxconsiderationsalwaysexceedthemarginalsocialcostsattrib-utabletorevenuelosses,efficiencycosts,anddistributionalimpacts.130Onthisbasis,hemaintains,“thediscontinuitythatthistestcreates isnotarbitrary,sincesmallchangesinnontaxattributesresultinachangeintaxtreatmentthatisjustifiedintermsoftheassociatedconsequentialattributes.”131

Fromanon-consequentialistperspective,ontheotherhand,therelevantquestionisnotwhetheraprimarypurposetestismoreorlessefficientthanasolepurposetestora significantpurpose testbutatwhatpointa transactionorarrangementissufficientlyinfluencedbytaxconsiderationsthattheobjectandpurposeofthe

125 See,forexample,theAustralianGAAR,supranote 4.

126 UKGAAR,supranote 5;PPT,supranote 6.

127 See,forexample,Lloyds Equipment Leasing (No 1) Ltd v. Revenue & Customs,[2012]UKFTT47(TC),atparagraph 388,whichwasaffirmedbytheCourtofAppealinRevenue and Customs v. Lloyds TSB Equipment Leasing (No 1) Ltd,[2014]EWCACiv1062,atparagraph 52;andTravel Document Service & Ladbroke Group International v. Revenue & Customs (Rev 1),[2018]EWCACiv549,atparagraph 48.

128 NewZealand’sGAARisanotableoutlierinthisrespect,applyingwhereanarrangement“hastaxavoidanceasitspurposeoreffect”or“[one]ofitspurposesoreffects,whetherornotanyotherpurposeoreffectisreferabletoordinarybusinessorfamilydealings,ifthetaxavoidancepurposeoreffectisnotmerelyincidental,”anddefining“taxavoidance”toinclude“directlyorindirectlyalteringtheincidenceofanyincometax.”SeeIncomeTaxAct2007,2007No. 97,sectionYA1.AsMichaelLittlewoodexplains,thisrulecould“produceabsurdresults”byapplyingtovirtuallyanytransactionthatresultsinareductionoftax.SeeMichaelLittlewood,“ThePossibilityofAmendingNewZealand’sAnti-AvoidanceRule”(2013)25:3New Zealand Universities Law Review522,at 527.Asaresult,thecourtsinNewZealandhavelimitedthescopeoftherulethroughabroad“parliamentarycontemplationtest”thatexcludesarrangementsthatareconsistentwiththeobjectandpurposeofthelegislation.Elliffe,supranote 4,at 154-55.


130 Ibid.,at 865,figure 1.

131 Ibid.,at 891.


relevantprovisionsmaybereliedontodenyataxbenefitthatwouldotherwisebeobtainediftherelevantprovisionsareconstruedaccordingtoordinarymethodsofinterpretation.Whilesometaxlawscholarsarguethatthisdeparturefromtheprin-cipleoflegalcertaintyisjustifiedonlyifthesoleordominantpurposeforwhichatransactionorarrangementisundertakenorarrangedistoobtainataxbenefit,132 it isnotobviousthatthepresenceofasignificantorimportanttaxpurposeshouldnotbesufficienttotriggerthisresult.133Afterall,theGAARonlyappliesiftheobjectiveelementoftheruleisalsosatisfied.Asaresult,althoughthePPTintheCanadianGAAR has not been a significant impediment to its application, itwould not beunreasonabletolowerthisstandardtoastandardbasedon“oneoftheprincipalpurposes”ofthetransaction—particularlysincethisisthestandardadoptedinthePPTthatwillmodifymostofCanada’staxtreaties,andconsistencybetweenthesetestsmightbedesirable since eitherprovision could apply to the abuseof a taxtreaty.134

Misuse or Abuse TestSincethemeaningof“avoidance”involvesapurposefulacttogetaroundorgetoutofsomething,thisconceptlogicallyincludesnotonlyapurposefulactonthepartofthepersonorpersonswhoengageinavoidance,butalso“something”thatisavoided.BecauseaGAARappliesas“aprovisionoflastresort”onlywhereabenefitwouldotherwisebeobtainedundertheprovisionsofdomestictaxlegislationorataxtreaty,135itfollowsthattheavoided“thing”towhichaGAARappliesisnottheprovisionsthemselves,atleastastheyareordinarilyconstrued.Onthecontrary,astheobjectiveelementofgeneralanti-avoidancerulesandprinciplessuggests,theavoidedthingtowhichtheserulesandprinciplesapplyistheobjectorpurposeoftheseprovisions.136

132 See,forexample,EricC.C.M.Kemmeren,“WhereIstheEULawintheOECDBEPSDiscussion?”(2014)23:4EC Tax Review190-93;andLucDe Broe,“TaxTreatyandtheEULawAspectsoftheLOBandPPTProvisionProposedbyBEPSAction 6,”inRobertDanon,ed.,Base Erosion and Profit Shifting: Impact for European and International Tax Policy(Zurich:Shulthess,2016),197-253.

133 See,forexample,DennisWeber,“TheReasonablenessTestofthePrincipalPurposeTestRuleinOECDBEPSAction 6(TaxTreatyAbuse)VersustheEUPrincipleofLegalCertaintyandtheEUAbuseofLawCaseLaw”(2017)10:1Erasmus Law Review48-59.

134 ForadetailedanalysisofthepurposetestinthePPT,seeDavid G.Duff,“TaxTreatyAbuseandthePrincipalPurposeTest—Part 2”(2018)66:4Canadian Tax Journal947-1011,at 975-85.

135 Canada Trustco,supranote 1,atparagraph 21.

136 See,forexample,CIR v. Willoughby,[1997]4AllER65,at 73,perLordNolan,explainingthatthe“hallmark”oftaxavoidanceisthat“thetaxpayerreduceshisliabilitytotaxwithoutincurringtheeconomicconsequencesthatParliamentintendedtobesufferedbyanytaxpayerqualifyingforsuchreductioninhisliability.”Incontrasttothisview,ProfessorEdgarstatesthattaxavoidance“initsbroadest(andperhapsmostsimplisticsense) . . .referstoany


AccordingtotheCanadianGAAR,forexample,theprovisionappliestoanavoid-ancetransactiononlyifitmayreasonablybeconsideredthatthetransactionwouldresultinamisuseofrelevantprovisionsofdomesticlegislationorataxtreatyoranabusehavingregardtotheseprovisionsreadasawhole.137SubsequentlyincludedintheGAARsofseveralothercountries,138thismisuseorabusetestrequirescourtstodeterminewhetherthetaxbenefitresultingfromthe impugnedtransactionisconsistentwiththeobject,spirit,orpurposeoftherelevantprovisions.139TheUK GAAR also includes an abuse requirement,which it defines, in an unfortunatelyconvolutedway,as“arrangementstheenteringintoorcarryingoutofwhichcannotreasonablyberegardedasareasonablecourseofactioninrelationtotherelevanttaxprovisions,havingregardtoallthecircumstances”—including,amongothers,“whetherthesubstantiveresultsofthearrangementsareconsistentwithanyprin-ciplesonwhichthoseprovisionsarebased(whetherexpressorimplied)andthepolicyobjectivesofthoseprovisions.”140Incontrasttotheseprovisions,theobjectiveele-ments in the PPT and the EuropeanCouncilDirective codifying the EuropeanCourtofJusticeanti-abuseprinciplesimplyrefertotheobjectandpurposeoftherelevantprovisions.141

However these requirements may be expressed in law, their role within thestructureofageneralanti-avoidanceruleorprincipleisthesame:todrawalinebetweenlegitimatetaxplanningortaxminimizationandunacceptableorabusivetaxavoidancebymeansofaninterpretiveexercisethatexcludesfromthescopeoftheruleorprincipletransactionsorarrangementsthatareconsistentwiththeobject,spirit,orpurposeoftherelevantprovisions.142Inthisrespect,therefore,theobjectiveelementofaGAARappliestheteleologicalinterpretiveapproachthatwouldotherwise

changeinbehaviorthatoccursasaresponsetothechangeinpriceofparticularactivities,assets,ortransactionsoccasionedbytheimpositionoftaxation.”Edgar,“BuildingaBetterGAAR,”supranote 12,at 843,citingMichaelBrooksandJohn G.Head,“TaxAvoidance:InEconomics,LawandPublicChoice,”inGraeme S.Cooper,ed.,Tax Avoidance and the Rule of Law(Amsterdam:IBFD,1997),53-91,at 71-74.Althoughacknowledgingthat“theconceptoftaxavoidanceusedinlawisanarroweronethatconsistsofanapparentlyimprecisesubsetofthisbroaderrangeofbehavioraladjustments,”Edgartakestheviewthat“theidentificationoftax-avoidancetransactionsappropriatelysubjecttoprohibitionhasabsolutelynothingtodowithperceptionsoflegislativeintent.”SeeEdgar,“BuildingaBetterGAAR,”supranote 12,at 843and882.


138 See,forexample,IncomeTaxAct,1961(India),section 96(1)(b);TaxesConsolidationAct,1997(Ireland),section 811(3)(b);andtheSouthAfricanGAAR,supranote 124,section 80A(c)(ii).

139 Canada Trustco,supranote 1,atparagraph 55.


141 PPT,supranote 6andCouncilDirective2016/1164/EU,supranote 8.

142 See,forexample,Canada Trustco,supranote 1,atparagraphs 16and54-55.


contradictprinciplesoflegalityandlegalcertainty,143butisjustifiedwhenatrans-actionorarrangementisundertakenorarrangedinordertoobtainataxbenefit.144

As a result, as the SupremeCourt ofCanada has stated, a GAAR is “a legalmechanismwherebyParliamenthasconferredonthecourt theunusualdutyofgoingbehindthewordsofthelegislationtodeterminetheobject,spiritorpurposeof theprovisionorprovisions relieduponby the taxpayer.”145 JudithFreedmanmakesasimilarpoint,notingthattheinterpretiveexerciserequiredbyageneralanti-avoidanceruleorprincipleis“anunusualformofinterpretation”that“goesbeyond” what is normally understood as statutory interpretation.146 Since theobject,spirit,orpurposeoftaxprovisionsisnotalwaysclear,andsincethepoliciesandprinciplesunderlyingtheseprovisionsmaybeincompleteorinconsistent,thiscanbeadifficulttask.147Consequently,astheSupremeCourtofCanadastatedinCanada Trustco,148thelinethattheGAARdrawsbetweenlegitimatetaxminimizationandabusivetaxavoidanceis“farfrombright.”149

Asanaidtothisinterpretiveexercise,itisoftensuggestedthatthecommercialoreconomic substanceofa transactionorarrangement shouldbean importantconsideration.150Indeed,sincetaxlawgenerallyreliesonlegalconceptsinordertoassess economic outcomes,151 and since tax-avoidance transactions and arrange-mentscommonlyexploitdifferencesbetweenthelegalformofthesetransactionsandarrangementsandtheireconomiccharacter,152itisarguablethattheeconomic

143 Seetextaccompanyingsupranote 83.

144 Seetextaccompanyingsupranote 84.

145 Copthorne,supranote 1,atparagraph 66,perRothstein J.

146 Freedman,“TheAnatomyofTaxAvoidanceCounteraction,”supranote 8,at 375-76.

147 Atkinson,supranote 57,at 40,notingthat“taxstatutesareoftendraftedinsignificantdetail,leavinglittleornoroombeyondtheexpresswordsforaninferenceastothepurposeofaprovision”andthat“taxprovisionsareoftenunclear,incoherentorlackingofaconsistentpolicyframework,suchthatitisdifficulttodiscernanyunderlyingparliamentarypurpose.”

148 SeeCanada Trustco,supranote 1.

149 Ibid.,atparagraph 16.

150 See,forexample,Brian J.Arnold,“TheLong,Slow,SteadyDemiseoftheGeneralAnti-AvoidanceRule”(2004)52:2Canadian Tax Journal488-511,at 504-10;andJinyan Li,“‘EconomicSubstance’:DrawingtheLineBetweenLegitimateTaxMinimizationandAbusiveTaxAvoidance”(2006)54:1Canadian Tax Journal23-56.

151 See,forexample,Freedman,“DefiningTaxpayerResponsibility,”supranote 8,at 343,observingthatthetaxsystemisbasedonlegalrealityratherthaneconomicreality“becausethatistheonlypracticalandoperablewaytoconstructataxsystem.”

152 Consider,forexample,thearrangementinDuke of Westminster,supranote 59,whichconvertedwhatwasineconomicsubstanceanon-deductiblesalarypaymenttotheDuke’sgardenerintowhatwasinlegalformapaymentunderadeedofcovenantthatwaseffectivelydeductiblefortaxpurposes;andthetransactionsinGregory v. Helvering,supranote 79,whichsoughttoconvertwhatwasineconomicsubstanceataxablecorporatedistributionintowhatwasinlegalformatax-freecorporatereorganization.


substanceofatransactionorarrangementisalwaysrelevantindecidingwhetheratransactionorarrangementresultsinamisuseorabuseoftheprovisionsatissue.153 Thus,althoughsometaxprovisions,suchastaxincentiveprovisions,maycontem-plateorencouragetransactionsorarrangementslackinganyeconomicsubstanceinorder topromotespecificpolicyobjectives, it seemsreasonable toconcludethatmosttransactionsorarrangementswithlittleornoeconomicsubstancecontradicttheobject,spirit,orpurposeofmosttaxprovisions.154

Forthisreason,severalGAARsexplicitlyrefertocommercialoreconomicsub-stance,orobjectivefactorsindicativeofeconomicsubstance,thatmaybetakenintoaccountindeterminingwhethertheGAARshouldapply.AccordingtotheAustralianGAAR,forexample,applicationoftheprovisionshouldbedetermined“havingregardto”variousmatters, including“the formandsubstanceof thescheme”and“anychangeinthefinancialpositionoftherelevanttaxpayerthathasresulted,willresult,ormayreasonablybeexpectedtoresult,fromthescheme.”155TheSouthAfricanGAARgoesfurther,stipulating“inthecontextofbusiness”thattheprovisionappliestoatax-motivatedarrangementthat“lackscommercialsubstance,”156takingintoaccount“characteristics . . .thatareindicativeofalackofcommercialsubstance”suchasan inconsistencybetween“the legal formof [the] individualsteps”ofanarrangementand“[its]legalsubstance”oreffect“asawhole,”157andfurtherstipu-latingthatanavoidancearrangementlackscommercialsubstanceifitwould(butfortheGAAR)resultinasignificanttaxbenefitforaparty“butdoesnothaveasig-nificanteffectuponeitherthebusinessrisksornetcashflowsofthatpartyapart

153 See,forexample,Arnold,“TheLong,Slow,SteadyDemiseoftheGeneralAnti-AvoidanceRule,”supranote 150,at 507,concludingthat“itisdifficulttoseehowtransactionscouldbeconsideredtobeabusiveiftheeconomicsubstanceofwhatthetaxpayerdidcannotbeconsidered”;andCassidy,“ToGAARorNotToGAAR,”supranote 4,at 304,concludingthatthemisuseorabusetestwillbe“nugatory”ifcourts“cannotlookatthesubstanceofthetransactiontodetermineifthereisamisuseorabuse.”

154 Taxincentiveprovisionsareanobviousexampleoftaxprovisionsthatmaycontemplateorencouragetransactionswithlittleornoeconomicsubstance,butsoareotherprovisionsthatarenotproperlycharacterizedastaxincentives,suchasprovisionsthatallowtransactionstofacilitatetheconsolidationoflossesamongrelatedentities.

155 AustralianGAAR,supranote 4,section 177D(2).SincetheAustralianGAARdoesnotincludeanexplicitmisuseorabusetest,ittakesthesefactorsintoaccountindeterminingthepurposeforwhichapersonorpersonsenteredintoorcarriedoutthetax-avoidancescheme.AlthoughthesefactorsmayberelevanttothepurposetestofaGAAR,itisarguablethattheyaremorerelevanttotheconceptsofmisuseorabuse.ForasimilarargumentconcerningtheroleofeconomicsubstanceintheapplicationofthePPT,seeDuff,supranote 134,at 983and993-98.

156 SouthAfricanGAAR,supranote 124,section 80(A)(a)(ii).Inthiscontext,thecommercialsubstancetestdisplacesthemisuseorabusetest.

157 Ibid.,section 80(C)(2)(a).Seealsoibid.,section 80(C)(2)(b),referringto“theinclusionorpresenceof(i)roundtripfinancingasdescribedinsection 80(D);or(ii)anaccommodatingortaxindifferentpartyasdescribedinsection 80(E);or(iii)elementsthathavetheeffectofoffsettingorcancellingeachother.”


fromanyeffectattributabletothetaxbenefitthatwouldbeobtainedbutfortheprovisions”ofthetaxlegislation.158TheUK GAARadoptsasimilarbutmoreflexibleapproach,providingalistoffactorsthat“mightindicatethattaxarrangementsareabusive,”includingthatthearrangementsresultin“anamountofincome,profitsorgains for taxpurposes that is significantly less than theamount foreconomicpurposes”orin“deductionsorlossesofanamountfortaxpurposesthatissignifi-cantlygreaterthantheamountforeconomicpurposes”—provided,however,that“itisreasonabletoassumethatsucharesultwasnottheanticipatedresultwhentherelevanttaxprovisionswereenacted.”159

AlthoughtheCanadianGAARdoesnotincludeanyreferencetotheeconomicsubstanceofatransaction,orobjectivefactorsthatmightindicatethepresenceofeconomicsubstance,theDepartmentofFinanceexplanatorynotesthataccompaniedtheintroductionoftheCanadianGAARin1988statedthatthemisuseorabusetest“recognizesthattheprovisionsoftheActareintendedtoapplytotransactionswitheconomicsubstance,nottotransactionsintendedtoexploit,misuseorfrustratetheActtoavoidtax.”160Forthisreason,onemighthavethoughtthatCanadiancourtswould rely on this concept as an interpretive aid to themisuse or abuse test inGAAR.InCanada Trustco,161however,theSupremeCourtofCanadarejectedthisapproach,concludingthattheconceptofeconomicsubstance“haslittlemeaninginisolationfromtheproperinterpretationofspecificprovisionsoftheAct”andcanthereforeonlybe“consideredinrelationtotheproperinterpretationofthespecificprovisionsthatarerelieduponforthetaxbenefit.”162Onthisbasis,asBrianArnoldobservedinacriticalcommentonthedecision,“unlessaprovisionoftheActonwhichthetaxpayerisrelyingreferstoeconomicsubstance,lackofeconomicsub-stanceisnotanindicationofabuse.”163Asaresult,althoughasubsequentFederalCourtofAppealdecisionappearstohavereliedonabroadconceptofeconomic

158 Ibid.,section 80(C)(1).159 UKGAAR,supranote 5,section 207(4).160 Canada,DepartmentofFinance,Explanatory Notes to Legislation Relating to Income Tax(Ottawa:

DepartmentofFinance,June 1988),atclause 186,addingthat“taxincentivesexpresslyprovidedforinthelegislation”arenotintendedtobe“neutralized.”

161 Canada Trustco,supranote 1.162 Ibid.,atparagraph 76,concludingthatthetaxpayercoulddeductcapitalcostallowanceon

assetsthatithadacquiredatlittleornoeconomiccostpursuanttoacomplicatedseriesofcirculartransactionsonthegroundsthattheCCAprovisionsgenerallyallowdeductionsbasedonthelegalcostofassets,irrespectiveoftheirrealeconomiccost,anddepartfromthisapproachonlyinspecificallylimitedcircumstances.Inthisrespect,thecourtappearstohaveconcludedthatthetransactionswerenotabusiveonthegroundsthattheywerecontemplatedbytherelevantstatutoryprovisions.

163 Brian J.Arnold,“PolicyForum:ConfusionWorseConfounded—TheSupremeCourt’sGAARDecisions”(2006)54:1Canadian Tax Journal167-209,at 192.Forasimilarconclusion,seeDavid G.Duff,“TheSupremeCourtofCanadaandtheGeneralAnti-AvoidanceRule:Canada Trustco and Mathew,”inTax Avoidance in Canada After Canada Trustco and Mathew, supranote 12,at 36,arguingthatthecourt’sfailuretorecognizeabroadconceptofeconomic


substancetoconcludethataseriesoftransactionsresultedinamisuseorabuseofspecificprovisionsthatdonotspecificallyincorporatelanguageofeconomicsub-stance,164thestatusofeconomicsubstanceasaninterpretiveguidetotheCanadianGAARishighlyuncertain.

For thisreason, somecommentatorshavesuggestedthat theCanadianGAAR shouldbeamendedtoincludeanexplicitreferencetoobjectivefactorssuchaseco-nomicsubstanceinordertoprovideguidanceastothekindsofconsiderationsthatshouldbetakenintoaccountindeterminingwhetheratransactionorarrangementresultsinamisuseorabuse.165AccordingtoJudithFreedman,thisapproach“wouldhaveadouble functionof reminding the legislator toconsiderandspellout thebasisofnewlegislationaswellassupplyingdirectiontothecourtstoenablethemtoapplythespecificlegislationbeforetheminthewayintendedbyParliament.”166 Inaddition,aswiththecodificationofGAARitself,explicitreferencetoobjectivefactorssuchaseconomicsubstancewouldenhancethelegitimacyofthesecriteriaandincreasethelikelihoodthattheyareappliedinaclearandconsistentmanner.Asaresult,theadditionoftheseobjectivefactorswouldnotonlyimprovetheeffect-ivenessofGAAR,butalsocontributetoitsconsistencywithanon-consequentialistidealoflegality.

TheseobjectivefactorscouldbebasedinpartonthoseidentifiedintheGAARs of otherjurisdictions,particularlythoseenactedafterCanadaintroduceditsGAAR—for example,theUK GAAR,whichdoesnotactuallyusethewords“economicsubstance”butinsteadidentifiesobjectivefactorsindicatingalackofeconomicsubstance,suchas“anamountofincome,profitsorgainsfortaxpurposesthatissignificantlyless

substanceiscloselyrelatedtoitsnarrowinterpretationoftheconceptofanabuse“havingregardto”provisionsoftheITAandotherrelevantenactments“readasawhole,”whichitmergedwiththenarrowerconceptofamisuseofspecificprovisionsthemselves.

164 Triad Gestco Ltd. v. Canada,2012FCA258,atparagraphs 39and41,concludingthataseriesoftransactionsthatcreated“alossonpaperonlyinthesensethatnoeconomiclosswassuffered”resultedinamisuseandabuseofspecificprovisionsfortaxingcapitalgainsonthebasisthat“thecapitalgainsystemisgenerallyunderstoodtoapplytorealgainsandreallosses.”

165 See,forexample,Arnold,“TheLong,Slow,SteadyDemiseoftheGeneralAnti-AvoidanceRule,”supranote 150,at 511;andFreedman,“InterpretingTaxStatutes,”supranote 42,at 75and79,observingthat“[t]helegislaturemusttakesomeoftheblame”forthedecisioninCanada Trustco“fornotspellingouttheprinciplessufficientlyinthebodyoftheGAAR,despitereferringtoeconomicsubstanceintheexplanatorynotestothelegislation.”

166 Freedman,“InterpretingTaxStatutes,”supranote 42,at 75.FreedmanalsoarguesthataGAARshouldbeaccompaniedbyexpressstatementsoftheprinciplesunderlyingdetailedlegislativeprovisionsthatwouldprovidefurtherguidancetotheobjectandpurposeoftheseprovisions.Ibid.,at 87,statingthat“thedraftingofspecificlegislationneedstobecomemoreexplicitabouttheunderlyingprinciplesofthelegislation.”Formoredetaileddiscussionsaboutprinciples-basedapproachestothedraftingoftaxlegislation,seeJohn F.AveryJones,“TaxLaw:RulesorPrinciples?”[1996]no. 6British Tax Review580-600;Graeme S.Cooper,“LegislatingPrinciplesasaRemedyforTaxComplexity”[2010]no. 4British Tax Review 334-60;andJudithFreedman,“Improving(NotPerfecting)TaxLegislation:RulesandPrinciplesRevisited”[2010]no. 6British Tax Review717-36.


thantheamountforeconomicpurposes”or“deductionsorlossesofanamountfortaxpurposesthatissignificantlygreaterthantheamountforeconomicpurposes.”167 IntheCanadianGAAR,asintheUK GAAR,thesefactorswouldoperateasinterpret-iveguidelinesorpresumptions, andwouldbe subject toanexceptionwhen it isreasonabletoconsiderthatthetaxbenefitwas intendedoranticipatedwhentherelevantprovisionswereenacted.

Furtherguidancemightalsobederivedfromthevaluable“taxonomy”oftax-avoidance transactions that Professor Edgar devised, noting that tax-avoidancetransactionsthatlackeconomicsubstancecangenerallybecategorizedintooneofthreetypes:

1. transactionsthatcreateataxattributesuchasadeduction,loss,ortaxcreditthatcanbeusedtoshelterincomefromtax(“tax-attributecreation”);

2. transactionsthattransfertaxattributes,suchasincome,deductions,losses,or tax credits, fromone taxpayer to another inorder toobtain a joint taxbenefitthatcanbesharedbetweenthetaxpayers(“tax-attributetrading”);and

3. transactionsandarrangementswhosenon-taxcharacteristicscloselyreplicatethoseofanalternativetransactionorarrangement,butresultinsubstantiallylesstaxthanthealternative(“transactionalsubstitutions”).168

AsProfessorEdgarobserved,thesekindsoftransactionsarefamiliartomosttaxprofessionals and represent the vastmajority of tax-avoidance cases that appearbefore thecourts.169For these reasons, itmakes sense todrawuponcriteria thatcourts have considered abusive in order to devise objective factors ofmisuse orabuse.AswithfactorsderivedfromtheGAARsofotherjurisdictions,thesefactorswouldalsooperateasinterpretiveguidelinesorpresumptionsandbesubjecttoanexceptionwhenit isreasonabletoconsiderthatthetaxbenefitwas intendedoranticipatedwhentherelevantprovisionswereenacted.



169 ForausefulcategorizationofCanadianGAARaccordingtothesecategoriesupto2006,seeEdgar,“DesigningandImplementingaTarget-EffectiveGeneralAnti-AvoidanceRule,”supranote 12,at 257-58.AnupdatedlistofnotableCanadiancasesineachcategoryinclude:(1) transactionslikethoseinTriad Gestco,supranote 164,thatcreateoffsettinggainsandlosses,theformerofwhicharedeferredand/ortax-preferredornon-taxable,whilethelatterareusedtosheltercurrentincomefromtax;(2) income-shiftingtransactionslikethoseinCanada v. 594710 British Columbia Ltd.,2018FCA166,thatallocateincomefromonetaxpayertoanotherwhoiseithertaxableatalowerrateorhaslossesorotherdeductionsthatshelterthisincomefromtax,anddeduction-shiftingtransactionslikethoseinCanada Trustco,supranote 1andMatthew,supranote 14,thattransferlossesorotherdeductionsfromonetaxpayertoanothertowhomthesedeductionsaremorevaluable;and(3) surplus-strippingtransactions,likethoseinMcNichol and RMM,supranote 121,thatconvertwhatwouldotherwisebetaxabledividendsintotax-preferredcapitalgains,andtreaty-shoppingarrangements,likethoseinMIL


Although Professor Edgar recommended that GAAR should be amended toinclude a concept of economic substance based on these three categories of taxavoidance,170hewouldhaverejectedthesuggestionthatobjectivefactorsbasedonthesecategoriesshouldoperateasinterpretiveguidelinesorpresumptionsratherthanfixedrules,andwouldhavecriticizedtheideathatthesefactorsshoulddrawon criteria that courts themselves have considered abusive.On the contrary, heargued,theharmfulconsequencesattributabletothesetransactions(assumingthattheyareprimarilytax-motivated)aresuchthattheyshouldallbesubjecttoGAAR withouthavingto“engageinageneralizedexerciseinstatutoryinterpretationtodetermine whether the particular tax avoidance transaction is acceptable.”171 Inaddition,hesuggested,itis“simplynotclearthatthejudiciaryhasthekindofinsti-tutionalcompetencetoengageinthepolicy-basedinquiryimplicatedbyastatutoryinterpretationexercise.”172Forthesereasons,heconcludedthattheroleofstatu-toryinterpretationintheapplicationofGAARshouldbe“significantlydiminished”oreliminatedaltogetherbyamendingGAARintwoways:(1) deemingalltax-attribute-creation and tax-attribute-trading transactions to constitute a misuse or abuse“unless there isanexplicit legislativeregimesanctioningthetransaction,”173 and (2) addinganeconomicsubstanceconcept“astantamounttothesyntheticreplica-tionofahigher-taxedtransaction . . .toenablethejudiciarytoaddressalimitedrangeoftransactionalsubstitutions.”174

Forthepurposeofthispaper,itislessimportanttoaddressthedetailsoftheserecommendationsthanitistoexplainwhytheydifferfrommyownrecommenda-tions for amending GAARandhowtheyrelatetoalternativeconceptionsregardingthe essentialpurposesof aGAAR.FromProfessorEdgar’s consequentialistper-spective,thefunctionofaGAARistoensureanefficientleveloftaxavoidancebybalancingitsmarginalcostsandbenefits—ataskforwhichthejudiciaryis(withthedeepestofrespect)obviouslyunsuited.Fromanon-consequentialistperspective,ontheotherhand,theultimatepurposeofaGAARistoprotecttheintegrityofthetaxprovisionsatissuebydiscouragingandcounteractingtransactionsandarrangementsthatcontradicttheirobjectsorpurposes.Althoughthisisnotaneasytask,andis

(Investments) SA and Alta Energy,supranote 121,thatenabletaxpayerstoobtainbenefitsunderataxtreatythatwouldotherwisebeunavailable.


171 Ibid.,at 880.

172 Ibid.,at 841.Seealsoibid.,at 837:“Itisutterlyhopelesstoleaveittothejudiciarytoarticulateabehavioralprohibitionthatisneitherunder-inclusivenorover-inclusiveinitsidentificationofprohibitedtransactions.Trainedaslawyers,andnotpublicpolicyanalysts,judges(andthelawyersappearingbeforethem)simplydonothavetheinstitutionalcompetencetoexecutethisimportanttask.”

173 Ibid.,at 895.

174 Ibid.,at 903.


bestassistedbylegislativeguidanceonthekindsofobjectivefactorsthatmaycon-stituteamisuseorabuseoftherelevantprovisions,itisaquintessentiallyjudicialfunctionforwhichcourtsareclearlycompetent.175

CONCLUSION

Generalanti-avoidancerulesandprincipleshaveanimportantroletoplayindomes-tictaxlegislationandtaxtreaties,notonlytopreventadverseconsequencessuchasrevenuelosses,efficiencycosts,inequitableshiftingoftaxburdens,andtheerosionofvoluntarytaxcompliance,butalsotoupholdtheruleoflawbydiscouragingandcounteracting transactionsandarrangements thatundermine the integrityof taxlawsandcontradicttheobjectandpurposeoftheselaws.Theserulesandprinciplesmaybeconsistentwiththeidealoflegalitytowhichtheruleoflawaspires,butthisis thecaseonly if theyaredesigned inamanner that isalsoconsistentwith theprinciplesonwhichthisidealisbased.Tothisend,Ihavearguedinthispaperthat

1. thestandardthatisadoptedtodiscourageandcounteractunacceptabletaxavoidance should be codified in the form of an explicit rule in domestictax legislationandtaxtreaties;

2. thisruleshouldinclude(a) a“subjectiveelement”orpurposetestand(b) an“objective element”ormisuse and abuse test, the secondofwhichdeter-mineswhetherthetransactionorarrangementatissueisconsistentwiththeobjectandpurposeoftherelevantprovisions,andthefirstofwhichjustifiestheapplicationofthisinterpretiveapproachinplaceoftheordinaryinter-pretive approachonwhich taxpayers canotherwise relyon thebasis of aprincipleoflegalcertainty;

3. the“subjectiveelement”orpurposetest(a) shouldbeassessedobjectivelybyreference to what a reasonable person would consider the purposes of atransactionorarrangementtobe(notthesubjectivepurposesofthepersonorpersonsinvolved),(b) mayreasonablybesatisfiedwhereoneoftheprin-ciplepurposesforwhichthetransactionorarrangementwasundertakenorarrangedwastoobtainataxbenefit,and(c) maybeinformedbyobjectiveindiciaofartificiality;

4. the“objectiveelement”ormisuseorabusetestshouldbeinformedbyobject-ivefactorsthatareindicativeofeconomicsubstanceandshouldbeexpresslyincorporatedintoaGAAR;

175 BrianJ.Arnold,“ReflectionsontheRelationshipBetweenStatutoryInterpretationandTaxAvoidance”(2001)49:1Canadian Tax Journal1-39,at 31.SeealsoArnold,“TheLong,Slow,SteadyDemiseoftheGeneralAnti-AvoidanceRule,”note 150,at 502,explainingthattheobject,spirit,andpurposeoflegislationare“concepts[that]shouldbefamiliartothecourtsbecausetheyformpartofthemodernapproachtostatutoryinterpretationasmandatedbytheSupremeCourtofCanada.”


5. theseobjectivefactorsshouldbeinformedbyfactorsincludedintheGAARs of other jurisdictions (for example, theUK GAAR), aswell as criteria thatcourtshaveconsideredabusiveinthevarioustypesoftax-avoidancecasesthat they have considered—cases thatProfessorEdgar veryusefully cat-egorized as tax-attribute-creation cases, tax-attribute-transfer cases, andtransactionalsubstitutioncases;

6. theseobjectivefactorsshouldoperatenotasfixedrules,butasguidelinesorpresumptionstowhichcourtscanrefertodeterminewhetheratransactionorarrangementresultsinamisuseorabuseoftheprovisionsatissue;

7. courtshavetheinstitutionalcompetencetocarryouttheinterpretiveexercisethatisrequiredunderamisuseorabusetest,particularlyifassistedbytheseobjectivefactors;and

8. the addition of these objective factors would improve the consistency ofGAARdecisionsandpromotelegalcertainty.

Inthisway,finally,thispaperhasarguedthataGAARisnotonlyconsistentwith,butessentialto,theidealoflegalitytowhichtheruleoflawaspires.

AlthoughIdisagreeinthispaperwithProfessorEdgar’sconsequentialistapproachto GAARs,myargumentwasinspiredandshapedbyaseriousengagementwithhisapproach—thekindofengagementthatIbelievemostacademicshopetostimulatethroughtheirscholarship.Ihopethatthisessayhonourshislegacyandisafittingtributetotheinfluenceofhisscholarship.

general anti-avoidance rules revisited: reflections on tim … 2020/issue 2... · 2020. 7. 19. ·...

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