On June 20, 2024, Bill C-59 received royal assent, enacting several pieces of legislation including changes to the General Anti-Avoidance Rule (GAAR) provisions in the Income Tax Act. The New GAAR applies to transactions that occur on or after January 1, 2024. However, Bill C-59 sets out that penalties only apply to transactions that occur on or after the bill receives royal assent. Effective June 20, 2024, penalties will apply to any avoidance transactions that are subject to the GAAR. The new GAAR penalties are 25% of the amount of the increased tax payable as a result of the amount payable (less any gross negligence penalties that are applicable).

Additionally, the definition of an “avoidance transaction” has been expanded to include transactions where one of the main purposes of the transaction is to obtain a tax benefit.

The new GAAR also includes a new preamble and an economic substance test. If a transaction is found to be significantly lacking in economic substance, then that will tend to indicate that a transaction is a misuse or abuse of the provisions of the Income Tax Act. Factors that establish a transaction is lacking in economic substance include: the fact that there is little or no opportunity for profit or risk of loss; the expected value of the tax benefit exceeds the expected non-tax return; and the entire (or almost entire) purpose of the transaction is to obtain a tax benefit.

The broader definition of an “avoidance transaction” and the new economic substance test result in the GAAR applying to more transactions that are entered into by taxpayers.

The normal reassessment period for transactions subject to the GAAR is also being extended by 3 years (unless such transactions are disclosed to the CRA).

Due to these significant changes, taxpayers should carefully consider the potential application of the GAAR when entering into any tax-motivated transactions.

Please reach out to the Dentons Tax team if you have any questions regarding these important tax changes.