The 2023 Federal Budget proposes some important approaches, amendments, and measures related to the General Anti-Avoidance Rule (GAAR) as well as sales and excise tax measures.
General Anti-Avoidance Rule (GAAR)
The GAAR is a rule that is intended to prevent taxpayers from engaging in abusive tax avoidance transactions but is not designed to interfere with legitimate commercial and family transactions. Currently, in cases where abusive tax avoidance is established, the GAAR applies to deny the tax benefit created.
A consultation paper was released by the government in August 2022, outlining various approaches to modernizing and strengthening the GAAR, and was closed for submissions on September 30, 2023. This budget takes these submissions into account and proposes amendments to the GAAR including:
- introducing a penalty;
- changing the avoidance transaction standard;
- introducing an economic substance rule;
- extending the reassessment period in certain circumstances.
Penalty – A penalty equal to 25% of the amount of the tax benefit would be introduced for transactions subject to GAAR. Where the benefit involves a tax attribute that has not been used to reduce tax, the amount of the tax benefit will be considered to be nil. The penalty could be avoided if the transaction is disclosed to the CRA, either as part of the proposed mandatory disclosure rules or voluntarily.
Avoidance transaction standard – The threshold for the avoidance transaction test in the GAAR would be reduced from a “primary purpose” test to a “one of the main purposes” test.
Economic substance rule - A rule would be added to the GAAR so that it better meets its initial objective of requiring economic substance in addition to literal compliance with income tax legislation. The proposed amendments would provide that the economic substance is to be considered at the “misuse or abuse” stage of the GAAR analysis and will provide indicators for determining whether a transaction is lacking in economic substance. These rules will ensure that a lack of economic substance is considered when determining whether a transaction is abusive.
Reassessment Period – A three-year extension to the normal reassessment period would be provided for GAAR assessments, unless the transaction had been disclosed to the CRA.
This budget invites submissions from stakeholders on these proposals, to be received by May 31, 2023. Following this period of consultation, the government intends to publish revised legislative proposals and announce the application date of these amendments.
Sales and excise tax measures
This budget proposes the following sales and excise tax measures to:
- amend the GST/HST definition of “financial services” to clarify that payment card clearing services rendered by a payment card network operator are excluded from the definition to ensure that such services generally continue to be subject to GST/HST;
- temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2% for one year, as of April 1, 2023;
- allow all licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter beginning on April 1, 2023;
- increase the Air Travellers Security Charge for transportation services that include a chargeable emplanement on or after May 1, 2024, for which any payment is made on or after that date.
These proposed amendments and measures could potentially impact many individuals and businesses. BDO's Tax team can help you understand implications and plan for the future.
For more information, please contact:
Rachel Gervais, Managing Partner, Tax Service Line
Harry Chana, International Tax Service Line Leader
Greg London, Domestic Tax Service Line Leader
The information in this publication is current as of March 28, 2023
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