Bill-C59 New GAAR Rules
We all knew it was coming, and it’s here: Expanded scope of GAAR rules is now in effect. See details below:
On June 20, 2024, Bill C-59 was officially granted Royal Assent, bringing significant changes to the General Anti-Avoidance Rule (GAAR) in the Income Tax Act. These changes are crucial for business owners to understand as they can impact tax planning strategies.
Expanded Definition of “Avoidance Transaction”
The definition now includes transactions where one of the main purposes is to gain a tax benefit. This broader definition means that more transactions will fall under GAAR scrutiny.
Introduction of the Economic Substance Test:
A new economic substance test has been added. If a transaction lacks significant economic substance, it is more likely to be viewed as a misuse or abuse of the Income Tax Act. Signs of lacking economic substance include:
- Little to no opportunity for profit or risk of loss.
- The expected tax benefit outweighs the expected non-tax return.
- The primary (or nearly entire) purpose of the transaction is to gain a tax benefit.
In practical terms, this means that almost any reorganization transaction (e.g. Section 85/86 rollover, inserting a trust, succession planning) could potentially be captured under GAAR. The legislation is broad, overreaching and ambiguous (so if someone could please launch a constitutional challenge that’d be great, please and thank you).
Key Dates to Remember
January 1, 2024: The New GAAR applies to transactions occurring on or after this date.
June 20, 2024: Penalties will apply to any avoidance transactions subject to GAAR from this date onwards. The penalty is set at 25% of the increased tax payable due to the avoidance transaction, minus any gross negligence penalties.
Extended Reassessment Period:
The normal reassessment period for GAAR-affected transactions is now extended by three years unless the transactions are disclosed to the CRA. This means a far longer window of uncertainty and stress for affected business owners.
What This Means for Business Owners:
Given these significant changes, it is essential for business owners to carefully evaluate any tax-motivated transactions to ensure compliance with the new GAAR provisions. Tax planning has always been onerous and required professional guidance, and now it’s even more challenging. Plan carefully.
If you have any questions or need assistance navigating these changes, please don’t hesitate to reach out to us at Parr Business Law. We are here to provide clear and practical advice tailored to your business needs.
