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April 8, 2024

GAAR and Economic Reality: When Imperfect Structures Survive Scrutiny

3295940 Canada Inc. demonstrates how judgment and disciplined framing can carry imperfect structures through GAAR review
By Peter Aprile & Jennifer Mak
GAAR and Economic Reality: When Imperfect Structures Survive Scrutiny
GAAR and Economic Reality: When Imperfect Structures Survive Scrutiny
2:09

Key Takeaways

  • Economic substance framed: The FCA upheld a constrained structure because it was positioned around real economic gains, not technical form.

  • Whole-plan control: GAAR outcomes often hinge on which narrative dominates. The FCA compared the CRA’s focus on isolated steps and the taxpayer’s framing of the entire plan.

  • Credible alternatives: When commercially realistic paths are demonstrated, CRA’s abuse framing weakens, and courts often accept the taxpayer’s resolution.

The Situation

Gestion Micsau Inc. owned 3295940 Canada Inc. (“3295”), which held a minority stake in a generic drug business. When the majority owner arranged a sale, the buyer refused to acquire 3295 directly. To preserve its tax position, Micsau implemented a series of transactions to replicate the effect of a direct sale and access the high ACB in its 3295 shares. CRA applied GAAR, assessing an additional $31.5 million in capital gains.

The Tax Court upheld CRA’s view, but the Federal Court of Appeal overturned it, finding the plan was not abusive and vacating the GAAR assessment.

What Made the Difference

The Federal Court of Appeal found that the series produced the same $53M taxable gain as a direct sale. By framing the transactions as a credible path to the same economic reality, the taxpayer undercut CRA’s abuse narrative. The Court emphasized that GAAR disputes turn on the overall sequence, not isolated steps. Control of the framing, that the plan taxed genuine economic gain, proved decisive.

The Signal for Business Leaders

In GAAR disputes, structures are rarely flawless. When counsel frame the outcome around credible economic reality, imperfect form often survives. When that framing is absent, CRA’s abuse narrative takes hold. The pattern is clear: outcomes in uncertain disputes do not hinge on elegance of structure, but on judgment and discipline in positioning an imperfect plan as a defensible resolution.

Case reference: 3295940 Canada Inc. v. The King, 2024 FCA 42

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