From Westminster to Lipson: What Canada Has Done for Eighty Years to Counteract Tax Avoidance

Abstract

Abstract: In this article I will focus on the diachronic development of the Canadian attitude towards tax avoidance in the last eighty years. I will start by emphasizing what is considered the foundation stone of Canadian tax system, the so-called Westminster principle. Subsequently, I will discuss all the specific judicial anti-avoidance doctrines used to circumscribe the application of the previous principle, namely the sham transaction doctrine, the ineffective (or ineffectual or incomplete) transaction doctrine, the substance over form doctrine, the step transaction doctrine and the business purpose test. After the Stubart case, where the Supreme Court rejected the business purpose test, Canadian government decided to adopt a statutory general anti-avoidance rule (GAAR) to counteract increasingly aggressive tax planning. Hence, I will first describe the cultural and legislative background which GAAR was based on, and, secondly, I will analyze the rule itself. Further, I will deal with how Tax Courts and the Federal Court of Appeal have judicially applied the GAAR prior to the long awaited decisions of the Supreme Court, Canada Trustco and Mathew, dated 2005. Finally, after a quick overview of the decisions following the first two Supreme Court’s rulings, I will conclude my article by reviewing the latest Supreme Court judgment, the Lipson case.