Anti-avoidance Rules

GST/HST Memorandum 16.4
March 2016

This version replaces the one dated February 2015 and outlines the new anti-avoidance rules relating to the provincial public service body rebate for municipalities in Newfoundland and Labrador.

This memorandum explains the application of the anti-avoidance rules in respect of the GST/HST.

All legislative references in this publication are to the Excise Tax Act (the Act) unless otherwise specified. The information in this publication does not replace the law found in the Act and its regulations.
 
If this information does not completely address your particular situation, you may wish to refer to the Act or relevant regulation, or call GST/HST Rulings at 1-800-959-8287 for additional information. If you require certainty with respect to any particular GST/HST matter, you may request a ruling. GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service explains how to obtain a ruling or an interpretation and lists the GST/HST rulings centres.

If you are located in Quebec and wish to request a ruling related to the GST/HST, please call Revenu Québec at 1-800-567-4692. You may also visit the Revenu Québec website at www.revenuquebec.ca to obtain general information.

For listed financial institutions that are selected listed financial institutions (SLFIs) for GST/HST or Quebec sales tax (QST) purposes or both, whether or not they are located in Quebec, the CRA administers the GST/HST and the QST. If you wish to make a technical GST/HST or QST enquiry related to SLFIs, please call 1-855-666-5166.

GST/HST Rates

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, see GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province .

Table of Contents

General

1. The anti-avoidance rules are intended to prevent persons from benefitting from transactions undertaken primarily for the purpose of avoiding, reducing, or deferring the payment of tax, or increasing a refund or rebate or other amount.

2. If a transaction is such that it is inconsistent with the overall spirit and intent of the Act, then an anti-avoidance rule may apply. For example, transactions that rely upon the strict wording of a provision in the Act to gain a benefit where none was intended and, therefore, defeat the purpose of the provision, would be subject to the anti-avoidance rules.

General anti-avoidance provision

3. Section 274 of the Act provides a general anti-avoidance rule (GAAR) that applies to all persons.

4. For purposes of section 274, the following expressions are defined in subsection 274(1):

5. Where an avoidance transaction is undertaken, subsection 274(2) provides that the tax consequences will be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that include that transaction.

6. Pursuant to subsection 274(3), an avoidance transaction is a transaction that alone, or as part of a series of transactions, would result, directly or indirectly, in a tax benefit were it not for section 274, unless the transaction can reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

7. Pursuant to subsection 274(4), subsection 274(2) does not apply in respect of a transaction where it may reasonably be considered that the transaction would not result, directly or indirectly, in a misuse of the provisions of Part IX or in an abuse of Part IX as a whole. Tax planning or transactions that are carried out for purposes other than obtaining tax benefits but which minimize the payment of tax, as compared to other transactions which would achieve the same purpose but which would result in higher tax liability, may not be considered to be avoidance transactions.

8. Pursuant to subsection 274(5), where subsection 274(2) applies, the following actions, without restricting the generality of subsection 274(2), may be taken into account in determining the tax consequences to a person that are reasonable in the circumstances in order to deny the tax benefits resulting from an avoidance transaction:

9. Pursuant to subsection 274(6), where the GAAR applies to a particular transaction under subsection 274(2) and a notice of assessment, reassessment, or additional assessment has been sent to a person in respect of that transaction, any other person may, within 180 days after the sending of the notice, request in writing an assessment, reassessment, or additional assessment to apply subsection 274(2) to that same avoidance transaction.

10. Pursuant to subsection 274(7), notwithstanding any other provision of Part IX, the determination of the tax consequences to any person, resulting from the application of section 274, will only be made through a notice of assessment, reassessment, or additional assessment. A person cannot use subsection 274(2) to revise their tax payable, or any other amount, without requesting an adjustment under the procedure outlined in subsection 274(6).

11. Pursuant to subsection 274(8), upon receipt of a request by a person under subsection 274(6), the Minister will consider the request with all due dispatch and assess, reassess, or make an additional assessment with respect to the person to the extent that the assessment, reassessment, or additional assessment relates to the avoidance transaction of another person. The Minister is not restricted to the four-year time limit in subsections 298(1) and (2) when considering a request made under subsection 274(6).

Anti-avoidance rules respecting rate change

Variation of agreement – 2006 rate reduction

12. Section 274.1 provides an anti-avoidance rule where:

13. If the above conditions are satisfied, the GST in respect of the supply made under the varied, altered, or new agreements will be calculated at the rate of 7% on any part of the consideration attributable to any part of the property or service.

Variation of agreement – 2008 rate reduction

14. Section 274.11 provides an anti-avoidance rule where:

15. If the above conditions are satisfied, the GST in respect of the supply made under the varied, altered, or new agreements will be calculated at the rate of 6% or 7% (as the case may be) on any part of the consideration attributable to any part of the property or service.

Anti-avoidance rules – rate changes

16. Section 274.2 contains an anti-avoidance rule to prevent persons from improperly taking advantage of a change in the rate of tax imposed under Part IX.

17. For purposes of section 274.2, the following expressions are defined in subsection 274.2(1):

18. Subsection 274.2(2) provides that the amount of tax, net tax, input tax credit, rebate, or other amount payable by, or refundable to, one or more of the persons involved in the following transaction or series of transactions, or any other amount relevant to computing that amount, is to be determined by the Minister as is reasonable in the circumstances in order to deny the tax benefit to any of those persons, where the following conditions are met:

19. Pursuant to subsection 274.2(3), despite any other provision of Part IX, a tax benefit will only be denied under subsection 274.2(2) through an assessment, reassessment, or additional assessment.

20. Pursuant to subsection 274.2(4), where the anti-avoidance rule applies to a particular transaction under subsection 274.2(2) and a notice of assessment, reassessment, or additional assessment has been sent to a person in respect of that transaction, any other person may, within 180 days after the sending of the notice, request in writing an assessment, reassessment, or additional assessment to apply subsection 274.2(2) to that same avoidance transaction.

21. Pursuant to subsection 274.2(5), upon receipt of a request by a person under subsection 274.2(4), the Minister will consider the request with all due dispatch and assess, reassess, or make an additional assessment with respect to the person to the extent that the assessment, reassessment, or additional assessment relates to the avoidance transaction of another person. The Minister is not restricted to the four-year time limit in subsections 298(1) and (2) when considering a request made under subsection 274.2(4).

Anti-avoidance rules relating to harmonization – Part 2 of the New Harmonized Value-Added Tax System Regulations

Application

22. Pursuant to section 34 of the New Harmonized Value Added Tax System Regulations (the regulations), the anti-avoidance rules in Part 2 of the regulations apply despite any provision of the Act.

Variation of agreement – new harmonized province

23. Section 35 of the regulations provides an anti-avoidance rule where:

24. If the above conditions are satisfied, the provincial part of the HST in respect of the supply made under the varied, altered, or new agreements will be calculated at the tax rate of the participating province that would have been calculated in respect of the supply made under the original agreement on any part of the consideration attributable to any part of the property or service.

25. Section 35 of the regulations applies to any agreement varied or altered, or terminated on or after March 26, 2009 and to any new agreement entered into on or after that date.

Variation of agreement – change in tax rate

26. Section 36 of the regulations provides an anti-avoidance rule where:

27. If the above conditions are satisfied, the provincial part of the HST in respect of the supply made under the varied, altered, or new agreements will be calculated at the higher tax rate of the participating province that would have been calculated in respect of the supply made under the original agreement on any part of the consideration attributable to any part of the property or service.

28. Section 36 of the regulations applies to any agreement varied or altered, or terminated on or after April 6, 2010 and to any new agreement entered into on or after that date.

Harmonized event – transactions

29. Section 37 of the regulations contains an anti-avoidance rule to prevent persons from improperly taking advantage of a harmonization event.

30. For purposes of section 37 of the regulations, the following expressions are defined in subsection 37(1):

31. Subsection 37(2) of the regulations provides an anti-avoidance rule in respect of the provincial part of the HST where:

32. If the above conditions are satisfied, the amount of tax, net tax, input tax credit, rebate, or other amount payable by, or refundable to, a person(s) under Part IX who is involved in the transactions or series of transactions, or any other amount relevant to computing that amount, is to be determined by the Minister as is reasonable in the circumstances in order to deny the tax benefit to any of those persons.

33. Section 37 of the regulations applies to any transaction made on or after March 26, 2009.

34. Pursuant to subsection 37(3) of the regulations, a tax benefit will only be denied under subsection 37(2) through an assessment, reassessment, or additional assessment under Part IX.

35. Pursuant to subsection 37(4) of the regulations, where the anti-avoidance rule applies to a particular transaction under subsection 37(2) and a notice of assessment, reassessment, or additional assessment has been sent to a person in respect of that transaction, any other person may, within 180 days after the sending of the notice, request in writing an assessment, reassessment, or additional assessment to apply subsection 37(2) to that same avoidance transaction.

36. Pursuant to subsection 37(5) of the regulations, upon receipt of a request by a person under subsection 37(4), the Minister will consider the request with all due dispatch and assess, reassess, or make an additional assessment with respect to the person to the extent that the assessment, reassessment, or additional assessment relates to the avoidance transaction of another person. The Minister is not restricted to the four-year time limit in subsections 298(1) and (2) when considering a request made under subsection 37(4) of the regulations.

Anti-avoidance rules relating to the provincial public service body rebate for municipalities in Newfoundland and Labrador – Part 3.2 of the New Harmonized Value-Added Tax System Regulations

37. Section 58.47 of the regulations contains an anti-avoidance rule to prevent municipalities resident in Newfoundland and Labrador from improperly taking advantage of an increase in the public service bodies’ (PSB) rebate rate applicable to municipalities in that province.

38. Where this anti-avoidance rule applies, the municipality’s PSB rebate of the provincial part of the HST payable on the acquisition of the property involved will be reduced. This reduction will also impact the basic tax content of the property, as the definition of "basic tax content" takes into account the PSB rebate that a person is entitled to claim, or that the person would have been entitled to claim if the property had been acquired for use exclusively in activities that are not commercial activities.

39. For purposes of section 58.47 of the regulations, the following expressions are defined in subsection 58.47(1):

40. For claim periods ending after 2015, subsection 58.47(2) of the regulations requires that a person’s PSB rebate of the provincial part of the HST payable on the acquisition of property by the person after the person last made a supply of the property by way of sale be adjusted. The anti-avoidance rule in subsection 58.47(2) applies where the following conditions are met:

41. Pursuant to subsection 58.47(3) of the regulations, if the above conditions are met, the person’s PSB rebate of the provincial part of the HST will be adjusted in accordance with the following rules:

(a) if the reacquisition is a supply by way of sale, the PSB rebate of the provincial part of the HST is reduced by the amount determined by the formula

A − B

where

"A" is the specified portion of the basic tax content of the property at the time at which the initial supply of the property was made, and

"B" is the amount that would be, if no improvements had been made by the person to the property since the last acquisition of the property by the person and in the absence of paragraph 58.47(3)(a), the specified portion of the basic tax content of the property at the end of the claim period; and

(b) if the reacquisition is a supply made otherwise than by way of sale,

A − B

where

"A" is the total tax, and

"B" is the specified portion of the basic tax content of the property at the time at which the initial supply of the property was made.

42. Section 58.47 of the regulations is deemed to have come into force on July 15, 2015.

Further information

All GST/HST technical publications are available on the CRA website at www.cra.gc.ca/gsthsttech.

To make a GST/HST enquiry by telephone:

  • for general GST/HST enquiries, call Business Enquiries at 1-800-959-5525
  • for technical GST/HST enquiries, call GST/HST Rulings at 1-800-959-8287

If you are located in Quebec, call Revenu Québec at 1-800-567-4692 or visit their website at www.revenuquebec.ca.

If you are a selected listed financial institution (whether or not you are located in Quebec) and require information on the GST/HST or the QST, go to www.cra.gc.ca/slfi or

  • for general GST/HST or QST enquiries, call Business Enquiries at 1-800-959-5525
  • for technical GST/HST or QST enquiries, call GST/HST Rulings SLFI at 1-855-666-5166

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