Income Tax Act

Marginal note:Preamble

• 245 (0.1) This section of the Act contains the general anti-avoidance rule, which

  • (a) applies to deny the tax benefit of avoidance transactions that result directly or indirectly either in a misuse of provisions of the Act (or any of the enactments listed in subparagraphs (4)(a)(ii) to (v)) or an abuse having regard to those provisions read as a whole, while not preventing taxpayers from obtaining tax benefits contemplated by Parliament; and

  • (b) strikes a balance between

    • (i) the Government of Canada’s responsibility to protect the tax base and the fairness of the tax system, and

    • (ii) taxpayers’ need for certainty in planning their affairs.

• Marginal note:Definitions

  (1) In this section,

  tax benefit

  tax benefit means

  • (a) a reduction, avoidance or deferral of tax or other amount payable under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty,

  • (b) an increase in a refund of tax or other amount under this Act, and includes an increase in a refund of tax or other amount under this Act as a result of a tax treaty, or

  • (c) a reduction, increase or preservation of an amount that could at a subsequent time

    • (i) be relevant for the purpose of computing an amount referred to in paragraph (a) or (b), and

    • (ii) result in any of the effects described in paragraph (a) or (b); (avantage fiscal)

  tax consequences

  tax consequences, to a person, means

  • (a) the amount of income, taxable income or taxable income earned in Canada of the person under this Act,

  • (b) the tax or other amount payable by, or refundable to, the person under this Act, or

  • (c) any other amount that is, or could at a subsequent time be, relevant for the purpose of computing an amount referred to in paragraph (a) or (b); (attribut fiscal)

  transaction

  transaction includes an arrangement or event. (opération)

• Marginal note:General anti-avoidance provision

  (2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

• Marginal note:Avoidance transaction

  (3) Unless it may reasonably be considered that obtaining the tax benefit is not one of the main purposes for undertaking or arranging a transaction, the transaction is an avoidance transaction if the transaction

  • (a) but for this section, would result, directly or indirectly, in a tax benefit; or

  • (b) is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit.

• Marginal note:Application of subsection (2)

  (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 in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or

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

• Marginal note:Economic substance — effect

  (4.1) If an avoidance transaction — or a series of transactions that includes the avoidance transaction — is significantly lacking in economic substance, this is an important consideration that tends to indicate that the transaction results in a misuse under paragraph (4)(a) or an abuse under paragraph (4)(b).

• Marginal note:Economic substance — meaning

  (4.2) Factors that establish that a transaction or series of transactions is significantly lacking in economic substance may include, but are not limited to, any of the following:

  • (a) all or substantially all of the opportunity for gain or profit and risk of loss of the taxpayer — taken together with those of all non-arm’s length taxpayers (other than those non-arm’s length taxpayers who can reasonably be considered, having regard to the circumstances viewed as a whole, to have economic interests that are largely adverse from those of the taxpayer) — remains unchanged, including because of

    • (i) a circular flow of funds,

    • (ii) offsetting financial positions,

    • (iii) the timing between steps in a series, or

    • (iv) the use of an accommodation party;

  • (b) it is reasonable to conclude that, at the time the transaction or series was entered into, the expected value of the tax benefit exceeded the expected non-tax economic return (which excludes both the tax benefit and any tax advantages connected to another jurisdiction); and

  • (c) it is reasonable to conclude that the entire, or almost entire, purpose for undertaking or arranging the transaction or series was to obtain the tax benefit.

• Marginal note:Determination of tax consequences

  (5) Without restricting the generality of subsection (2), and notwithstanding any other enactment,

  • (a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,

  • (b) any such deduction, exemption or exclusion, any income, loss or other amount or part thereof may be allocated to any person,

  • (c) the nature of any payment or other amount may be recharacterized, and

  • (d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,

  in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.

• Marginal note:Penalty

  (5.1) If subsection (2) applies to determine the tax consequences to a person for a taxation year in respect of a transaction that was not disclosed by the person to the Minister in accordance with section 237.3 or 237.4, the person is liable to a penalty for the taxation year equal to the amount determined by the formula

  (A + B) × 25% − C

  where

  A

  is the amount by which the tax payable by the person under this Act for the year exceeds the amount that would have been payable by the person under this Act for the year if subsection (2) had not applied in respect of the transaction;

  B

  is the amount by which the total of all amounts, each of which is an amount that would have been deemed to be paid on account of the person’s tax payable under Part I for the year if subsection (2) had not applied in respect of the transaction, exceeds the total of all amounts that are deemed to be paid on account of the person’s tax payable under Part I for the year; and

  C

  is the amount of any penalty payable by the person under subsection 163(2), to the extent that the amount is in respect of the transaction or a series that includes the transaction and did not reduce the penalty payable by the person under this subsection in a preceding taxation year.

• Marginal note:Penalty — exception

  (5.2) Subsection (5.1) does not apply to a person in respect of a transaction if the person demonstrates that, at the time that the transaction was entered into, it was reasonable for the person to have concluded that subsection (2) would not apply to the transaction in reliance on the transaction or a series that includes the transaction being identical or almost identical to a transaction or series that was the subject of

  • (a) published administrative guidance or statements made by the Minister or another relevant governmental authority; or

  • (b) one or more court decisions.

• Marginal note:Provisions applicable

  (5.3) Sections 152, 158, 159, 160.1, 164 to 167 and Division J of Part I apply to subsection (5.1) with such modifications as the circumstances require.

• Marginal note:Request for adjustments

  (6) Where with respect to a transaction

  • (a) a notice of assessment, reassessment or additional assessment involving the application of subsection 245(2) with respect to the transaction has been sent to a person, or

  • (b) a notice of determination pursuant to subsection 152(1.11) has been sent to a person with respect to the transaction,

  any person (other than a person referred to in paragraph (a) or (b)) shall be entitled, within 180 days after the day of sending of the notice, to request in writing that the Minister make an assessment, reassessment or additional assessment applying subsection (2) or make a determination applying subsection 152(1.11) with respect to that transaction.

• Marginal note:Exception

  (7) Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.

• Marginal note:Duties of Minister

  (8) On receipt of a request by a person under subsection 245(6), the Minister shall, with all due dispatch, consider the request and, notwithstanding subsection 152(4), assess, reassess or make an additional assessment or determination pursuant to subsection 152(1.11) with respect to that person, except that an assessment, reassessment, additional assessment or determination may be made under this subsection only to the extent that it may reasonably be regarded as relating to the transaction referred to in subsection 245(6).