The Gwartz Decision: The GAAR Is Not A Filler

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In Brianne Gwartz v. The Queen, 2013 TCC 86, the Crown attempted to utilize the GAAR to recharacterize as dividends certain capital gains which had been realized by a family trust and allocated to the minor-aged taxpayers in 2003, 2004 and 2005.  The Crown argued that the transactions giving rise to the GAAR circumvented section 120.4 (the “kiddie tax”) which was amended in 2011 to apply to certain capital gains paid to minors.

The taxpayers conceded the existence of a “tax benefit” and an “avoidance transaction”, leaving the only issue being whether there existed “abusive tax avoidance”.  The Tax Court of Canada made some interesting comments about the application of the GAAR generally and specifically as it related to this case, the main points of which can be summed up as follows:

  1. Tax planning is not inherently abusive for the purposes of ss. 245(4):  Taxpayers are entitled to plan their affairs in such a way that will minimize tax liability.  Choosing a course of action that minimizes the tax liability is not necessarily abusive [paras. 45 and 46].
  2. GAAR cannot be used to fill in the gaps:  Abusive tax avoidance cannot be found to exist if a taxpayer can only be said to have abused some broad policy that is not in itself grounded in the provisions of the Act.  “[I]t is inappropriate, where the transactions do not otherwise conflict with the object, spirit and purpose of the provisions of the [Act] to apply the GAAR to deny a tax benefit resulting from a taxpayer’s reliance on a previously unnoticed legislative gap” [para 47].
  3. There is no broad policy in the Act against surplus stripping:  In this case, the Crown contended that the taxpayers contravened the general policy against surplus stripping, but dropped this position at trial.  The Court noted that courts have held that surplus stripping does not inherently constitute abusive tax avoidance [para 50].
  4. There is no broad policy in the Act against income splitting:  The Court noted that the increasing marginal tax rates and the choice to tax the individual as the basic taxable unit create incentives under the Act for taxpayers to split their income with their family members [para. 52]. 
  5. The significance of subsequent amendments as an indicator of the policy underlying previous versions of a provision:  The Court noted subsequent amendments do not necessarily in themselves provide an indicator of some policy underlying the prior versions of a legislative provision.  Subsequent amendments must be considered along with all other relevant material to ascertain the object, spirit and purpose of the provision.  In certain circumstances, a subsequent amendment might suggest that the provision’s object or spirit were frustrated by the tax avoidance strategy. In other circumstances, it might suggest that Parliament simply changed its mind and now intends to prevent something that initially was not intended to be captured by the provision [para 57].

The Court ultimately allowed taxpayers’ appeals, finding that the object, spirit and purpose of section 120.4 of the Act were not indicative of a general policy against surplus stripping.  The Court held that the fact that specific anti-avoidance provisions were enacted at the time that 120.4 was enacted provided an indicator that Parliament was fully aware of the manner in which taxpayer’s could distribute corporate surplus.  Parliament’s exclusion of capital gains from section 120.4 was thus deliberately not intended to capture the transactions at issue.  In furtherance of this conclusion, the Court, by reviewing external evidence such as the 1999 Budget Plan and Notices of Way and Means Motions, found that the subsequent amendments to 120.4, which added only certain capital gains transactions, was evidence that “…Parliament decided not to cover capital gains when the measure was first enacted, and chose to do so on a prospective basis only in respect to a narrow subset of capital gains transaction.” [para. 74]