KPMG submitted comments in response to Finance’s recent public consultation on the legislative proposals to amend the General Anti-Avoidance Rule (GAAR). In its submission, KPMG tax professionals recommend that Finance clarify aspects of the proposals, including to clarify the various terminology used within the preamble, elaborate on how to measure a “significant lack” of economic substance and replace the proposed automatic penalty with a discretionary penalty based on criteria. The KPMG tax professionals also state that Finance should publish revised legislative proposals in draft form for an additional opportunity to comment. The proposals were previously released by Finance as part of the 2023 federal budget.


The GAAR is generally intended to enable tax authorities and courts to deny a tax benefit that results from abusive tax avoidance transactions. The 2023 federal budget introduced draft legislation to amend the GAAR, which is set out in section 245 of the Act (see TaxNewsFlash-Canada 2023-17, “2023 Federal Budget Highlights“). Finance stated that the proposed amendments are intended to modernize and update the GAAR, and were the result of Finance’s public consultation in August 2022. Finance noted that it will publish revised draft legislation, including the application date, after the consultation period. Stakeholders were invited to submit comments on the legislative changes by May 31, 2023.

In its changes to the GAAR, Finance added a preamble to address interpretative issues. The preamble indicates that the GAAR applies to deny the tax benefit of avoidance transactions, that is intended to strike a balance between taxpayer’s need for certainty and the responsibility to protect the tax base and can apply regardless of whether a tax strategy is foreseen.

Finance also reduced the threshold for determining whether a transaction is an avoidance transaction from a “primary purpose” test to “one of the main purposes” test.

In addition, Finance added an economic substance test that must be considered at the “misuse or abuse” stage of the GAAR analysis and that a lack of economic substance may indicate abusive tax avoidance.

Finance also proposed a penalty under the GAAR framework of up to 25% of the tax benefit, as well as an extension of the normal reassessment period by three years for GAAR assessments unless the transaction has been previously disclosed to the CRA.

For the GAAR to apply to a transaction, the transaction must result, directly or indirectly, in a tax benefit (subsection 245(1)), the transaction (or one in the series) must be an avoidance transaction (subsection 245(3)), and the transaction results in an abuse or misuse of the Act, Regulations, Application Rules, a Tax Treaty, or certain other tax enactments (subsection 245(4)).

KPMG recommendations

In its submission, KPMG makes several recommendations, including that Finance:

  • Clarify the various terminology used within the preamble added to the GAAR (e.g., “tax strategy” and “contemplated”), keeping in mind that the test for applying the GAAR is whether a tax benefit constitutes a misuse or abuse
  • Remove the reference to “fairness” in the preamble, and if not, it should be made clear that the concept of fairness is based on a textual, contextual and purposive analysis of the relevant provisions of the Act and Parliament’s intent in enacting such provisions
  • Offer guidance in respect of many commercially-driven transactions and structures that have a “secondary” tax element (and therefore would not satisfy the new avoidance transaction test)
  • Elaborate on the general parameters for how to measure a “significant lack” of economic substance (e.g., dollar terms, percentage terms, case-by-case basis)
  • Provide further examples of transactions (or series of transactions) that are considered to lack economic substance, but nonetheless do not result in a misuse or abuse
  • Implement a discretionary GAAR penalty with criteria that a taxpayer must meet, instead of implementing the proposed very significant and automatically applied penalty.

In addition, KPMG notes that Finance should publish revised legislative proposals in draft form, with a further opportunity for the tax community to provide comments and that any changes apply on a prospective basis.

For more details, see KPMG’s GAAR submission.

For more information, contact your KPMG adviser.

Information is current to June 12, 2023. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500