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Retroactivity and the General Anti-Avoidance Rule - University of

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					Retroactivity and the General
    Anti-Avoidance Rule


           Benjamin Alarie
Faculty of Law, University of Toronto
       Previous Version of s. 245(4):


For greater certainty, subsection 245(2) does
not apply to a transaction where it may
reasonably be considered that the transaction
would not result directly or indirectly in a misuse
of the provisions of this Act or an abuse having
regard to the provisions of this Act, other than
this section, read as a whole.
                New Version of s. 245(4)
Subsection (2) applies to a transaction only if it may reasonably
be considered that the transaction

(a) would, if this Act were read without reference to this section,
result directly or indirectly in a misuse of the provisions of any
one or more of
        (i) this Act,
        (ii) the Income Tax Regulations,
        (iii) the Income Tax Application Rules,
        (iv) a tax treaty, or
        (v) any other enactment that is relevant […]; or

(b) would result directly or indirectly in an abuse having regard to
those provisions, other than this section, read as a whole.
         Three Points to Discuss


1. General legal obstacles to retroactivity
2. Consequences for pending proceedings
3. Policy observations regarding retroactive
   changes to the GAAR more generally
 1. General Legal Obstacles to Retroactivity

• Presumption against retroactive legislation
     Contrary to the rule of law, ancient origins
• Strict interpretation of retroactive
  enactments
     Kent v. The King (SCC, 1924)
• Clear constitutional limits to retroactivity
  when liberty is at stake
     Charter: 11(g) and s. 7
1. General Legal Obstacles to Retroactivity

Most recent word from SCC on retroactivity:

      Except for criminal law, the retrospectivity and
      retroactivity of which is limited by s. 11(g) of the
      Charter, there is no requirement of legislative
      prospectivity embodied in the rule of law or in any
      provision of our Constitution.

(British Columbia v. Imperial Oil, SCC, Sept. 2005)
 2. Consequences for Pending Proceedings

Canada Trustco:
    “Although this amendment was enacted to
    apply retroactively, it cannot apply at this
    stage of appellate review, after the parties
    argued their cases and the Tax Court judge
    rendered his decision on the basis of the
    GAAR as it read prior to the amendment.”
          (para. 7)
 2. Consequences for Pending Proceedings
Is this an accurate statement of the law?

  - Hornby (BCCA, 1988): must be explicit to interfere with
  pending proceedings

  - Community Economic Development Fund v. Canadian
  `Pickles Corp. (SCC, 1991): “as the parties agree that the
  recently made amendments do not affect the outcome of
  this appeal, they need not under the circumstances be
  considered further”

  - CI Mutual Funds (FCA, 1999): “ample authorities” that
  legislation “need not specifically refer to pending actions”
       3. Policy Observations: Retroactivity
                   and the GAAR

Should there be compensation or grandfathering
when tax laws change?

Two primary views:
  Yes, as a general rule (the “old” view)

  No, as a general rule (the “conventional” view)

     Always winners and losers with tax reform;
     better to encourage individuals to anticipate
     and adjust (Graetz, 1977; Kaplow, 1986)
       3. Policy Observations: Retroactivity
                   and the GAAR

More realistic: desirability depends on the specific
nature of the rule change (Shaviro, 2000)
So what about retroactivity and the GAAR?
  Retroactive changes to improve the GAAR (e.g.
   245(4) amendment) should be expected as
   Parliament learns from experience
  Shutting down abusive tax avoidance is efficient

   economically, and if taken seriously is a goal that
   Parliament should want taxpayers to anticipate
     3. Policy Observations: Retroactivity
                 and the GAAR
What changes should be anticipated?
 Assume Parliament will target the greatest

  weaknesses of the GAAR
 Achilles’ Heel of the GAAR: no downside risk;
  therefore prima facie rational to “take a run at it”
 Parliament’s Solution: introduce heightened
  downside risk through some mechanism that will
  tend to tip the cost-benefit calculus against
  “taking a run at it”
                  Summary

1. Legally no impediment to retroactive tax
   legislation
2. Can affect pending proceedings if clear
3. Policy Observations:
      Changes to the GAAR should be retroactive
       because Parliament should want taxpayers to
       anticipate improvements to the GAAR
      Parliament’s Solution: introduce heightened
       downside risk
                      Conclusion
Policy makers:
 don’t be bashful about using retroactive powers
 think seriously about heightening tax liability if GAAR
    applies

Tax planners:
 assess political probability of heightened liability
   prospectively versus retroactively, given Parliament’s
   incentives
 be forthright in advising clients about possibility of
   heightened retroactive liability
 clear potentially “abusive” transactions in advance to
   resolve uncertainty

				
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