On June 20, 2024, changes to the general anti-avoidance rule (GAAR) received Royal Asset. Subsection 245(5.1) introduces a new penalty equal to 25% of additional tax payable by the taxpayer as a result of GAAR where the transaction was not disclosed by the taxpayer to the Minister.
Subsection 245(5.2) provides an exemption to the penalty if the taxpayer demonstrates that, at the time the transaction was entered into, it was reasonable to conclude that GAAR would not apply based on the transaction (or series) being identical or "almost identical" to one that was the subject of published administrative guidance or statements made by the Minister or another relevant government authority, or one or more court decisions.
We asked the CRA to elaborate on the meaning of "almost identical" and received the following response:
"As indicated in the Department of Finance Nov. 2023 Technical Notes to subsection 245(5.2), the exclusion is "intended to be a narrow rule that provides greater certainty to taxpayers that they may rely directly on relevant administrative guidance without fear that they could be subject to a GAAR penalty because of subsequent changes to law or policy". (Emphasis added)
Accordingly, the threshold requiring a transaction to be "identical or almost identical" to the transactions subject to published administrative guidance or statements made by the Minister or a court decision is quite high. Thus, entering into a transaction that is merely similar or uses the same general tax strategy is not enough to meet this stringent exception.
Prior to entering into any transactions, taxpayers should, therefore, consider whether their contemplated transactions are more than merely similar or rely on the same tax strategies as those referenced in the applicable administrative guidance or statement.
Taxpayers seeking certainty could always request a Ruling from the CRA's Income Tax Rulings Directorate. It should also be reiterated that a taxpayer will not be subject to the penalty if the particular transaction is disclosed in accordance with sections 237.3 or 237.4.
Taxpayers may consult the CRA's GAAR web page for more information on the GAAR."
------------------------------
Ryan Minor
Chartered Professional Accountants of Canada
------------------------------