CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
In addition, a 25% penalty has been introduced for transactions subject to the GAAR. This penalty is applied to the denied tax benefit and is effective for transactions entered into on or after 20 June 2024. However, the penalty can be avoided if the transac - tion was disclosed to the CRA or if it was reasonable to conclude that the GAAR would not apply based on existing guidance or court decisions.
The ITA contains a GAAR that applies to abusive tax avoidance cases where the ITA provisions result in a tax benefit outside of their original purpose. A transac - tion is considered an avoidance transaction when all three of the following conditions are met: • tax benefit must result from one transaction or a series of transactions – namely a reduction, avoid - ance or deferral of tax or an increased tax refund; • tax benefit results directly or indirectly from a trans - action that is considered an avoidance transaction, unless the transaction can reasonably be under - taken or arranged primarily for business purposes other than to obtain a tax benefit; and • tax avoidance as a result of not being able to rea - sonably conclude that the tax benefit is consistent with the object, spirit or purpose of the provision invoked by the taxpayer. It is incumbent on the taxpayer to establish that the first two conditions do not apply, while the burden for the third condition lies with the tax authorities. Any GAAR-issued assessment will have to be reviewed by a committee established by the CRA. If the CRA establishes abusive tax avoidance, the GAAR will apply and the tax benefit will be denied. If there is ambiguity with respect to abusive tax avoidance, the taxpayer is given the benefit of the doubt. Recently, amendments were made to broaden the definition of “tax benefit” to ensure that the GAAR will apply to transactions that affect tax attributes that have not yet become relevant to the computation of tax (eg, a tax loss that has not yet been used to offset taxable income). Furthermore, stricter rules applying for GAAR purposes have been implemented as of 2024, in order to: • lower the “avoidance transaction” standard; • increase the reassessment period by an additional three years (unless the transaction was disclosed to CRA); and • introduce a new economic substance rule to target transactions that lack economic substance.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
Canadian tax law does not outline specific rules regarding audit cycles, so Canada has no periodic routine audit cycle. Tax audits are typically carried out at the tax authorities’ discretion; as such, an audit of a timely filed tax return can be conducted at any time by the Canadian tax authorities with all due dispatch. Audit Process Auditors have consequential investigative powers and may require the filing and disclosure of documents and information necessary for the assessment. In general, the audit may begin with a formal demand letter requesting access to specific information, a physical visit to the place of business and/or a meet - ing with the individual taxpayer. In addition, the auditor may request, and be granted, access to third-party information, including banking and supplier docu - ments and, to a limited extent, accountant files. The process usually results in a draft or preliminary assessment, allowing for a 30-day window for the tax - payer to submit new information regarding the draft assessment issues. The formal time limit for issuing a reassessment notice is generally three or four years following the initial assessment notice for a given year depending on the status of the taxpayer, except in cases of negligence, fraud or failure to disclose transactions as required under the newly expanded mandatory disclosure rules. The reassessment period has also been extended by an additional three years unless the transaction was disclosed to the CRA. Some corporations will also face varying deadlines, depending on the nature of the audit.
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