General Anti-Avoidance Rule  

The general anti-avoidance rule (GAAR) is a legislative measure designed to counter aggressive tax planning that does not stem from a particular type of transaction.

Its goal is to eliminate the benefits of tax planning schemes that comply with the wording of the law, but constitute a violation in the application of its measures.

The process for determining whether the GAAR applies is a three-step process:

1. Determine whether there is a tax benefit arising from a transaction or series of transactions. A tax benefit includes any income tax reduction or deferral, or tax refund increase.  
2. Determine whether the transaction constitutes an avoidance transaction in the sense that it was carried out mainly for obtaining a tax benefit. 
3. Demonstrate whether the transaction is abusive. This step requires a two-part examination:
   • Determine the object and spirit of the legislative provisions relied on for the tax benefit.
   • Examine the facts to determine whether the avoidance transaction defeated or frustrated the object or spirit of the provisions at issue.

Note

All three steps must prove conclusive in order to invoke the GAAR to cancel the tax benefit.