GAAR — the Income Tax Act's catch-all anti-avoidance rule
General anti-avoidance rule
Section 245 gives CRA the power to recharacterize or deny tax benefits from transactions that are technically compliant with the Act but result in a misuse or abuse of its provisions — the General Anti-Avoidance Rule (GAAR).
Plain-language explanation
The GAAR is the Income Tax Act's ultimate backstop against aggressive tax planning. Even if a transaction is technically legal, CRA can apply GAAR to deny the tax benefit if the transaction:
1. Is an "avoidance transaction" (one of the main purposes is obtaining a tax benefit) 2. Results in a misuse of a specific provision of the Act, or an abuse of the Act read as a whole
The 2024 GAAR amendments (Bill C-59): Prior to 2024, the GAAR test asked whether the primary purpose was tax avoidance. The 2024 amendments (effective June 20, 2024) changed the test to whether obtaining a tax benefit was one of the main purposes — a significantly lower threshold for CRA.
The amendments also introduced: - A penalty of 25% of the denied tax benefit when GAAR applies (no penalty under the old rules) - An extended reassessment period of 3 additional years beyond the normal reassessment period when GAAR is in issue
What GAAR targets: GAAR is used against transactions designed to exploit literal compliance with the Act while defeating its policy objectives — creating artificial losses, surplus stripping, treaty shopping, loss multiplication, and similar arrangements. The courts have found GAAR does not apply to straightforward tax planning that uses provisions for their intended purpose.
GAAR does not eliminate tax planning: Section 245(4) has a carve-out: GAAR cannot apply to transactions that use provisions for their object, spirit, and purpose. RRSP contributions, incorporation for the SBD, and other mainstream planning strategies are not GAAR risks.
Example
A corporation with a large tax loss accrues inside enters into a series of transactions designed to transfer the loss to a profitable corporation unrelated to the original business. Even if each step is technically permitted, GAAR may apply to deny the loss transfer because it abuses the loss limitation rules.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
GAAR strengthened by Bill C-59 (Budget 2024 implementation): "main purpose" test replaces "primary purpose" test; 25% penalty added on GAAR assessments; reassessment period extended by 3 years.
Before
Required the primary purpose to be tax avoidance; no automatic penalty; no extended reassessment period
After
One of the main purposes is sufficient; 25% penalty applies; 3-year extended reassessment period added
Common questions
When does GAAR apply? +
GAAR applies when three conditions are met: (1) there is a tax benefit, (2) the transaction was an avoidance transaction (obtaining the benefit was one of its main purposes), and (3) the transaction resulted in a misuse or abuse of the Act. All three conditions must be satisfied.
Is normal tax planning (RRSP, incorporation) a GAAR risk? +
No. The Supreme Court in Canada Trustco confirmed that GAAR does not apply to transactions using provisions for their intended purpose. RRSP contributions, incorporation to access the SBD, and standard estate freezes are not GAAR risks.
What penalty does CRA impose under GAAR? +
Since June 20, 2024, CRA can impose a 25% penalty on the denied tax benefit when GAAR applies. Before 2024, there was no specific GAAR penalty (though interest would still accrue on denied amounts).
Key terms
CPA recommendation
GAAR risk assessment requires specialized tax counsel. Any transaction designed primarily for tax reasons should be reviewed by a tax lawyer or CPA experienced in aggressive tax planning before implementation.
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 245. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.