The Future of GAAR Once More in Doubt

A badly fractured seven-member panel of the Supreme Court of Canada gave the Canada Revenue Agency its biggest ever GAAR victory in Lipson v. The Queen (2009 SCC 1).

In a rare 4-2-1 decision, LeBel J. writing for the majority invoked a new "overall result" analysis to support the finding of the Tax Court. In dissent, Binnie J. (with whom Deschamps J. concurred) rejected the approach advocated by LeBel J. on the basis that the majority’s decision did not further the interests of consistency, predictability and fairness in the tax system. In a separate dissent, Rothstein J. concurred with much of the analysis of Binnie J. but went further to hold that the presence of a specific anti-avoidance rule (subsection 74.5(11)) precluded the use of GAAR to cover the same ground even where, as was the case in Lipson, the Minister did not rely upon that specific anti-avoidance rule.

The overall result in Lipson did not come as a surprise to the professional tax community. A convergence of factors led to what might be termed a "perfect judicial storm." In the first place, the decision under appeal was a carefully reasoned judgment of the Tax Court of Canada. Second, the Supreme Court sat a seven-member panel because of the retirement of Bastarache J. The result was that Chief Justice McLachlin, one of the more expert tax jurists on the Court, did not take part in the decision. Finally, there was a delay of almost nine months between the hearing of the appeal (April 23, 2008) and the issuance of the judgment (January 8, 2009). Such a very long delay is usually indicative of serious divisions within the Court.

The unfortunate result of Lipson is that whatever clarity emerged from the decision of the Supreme Court of Canada in Canada Trustco v. The Queen, ([2005] 2 S.C.R. 601) has essentially been dissipated by this new decision. The majority in Lipson arguably went much further than the trial judge’s carefully reasoned decision and appears to have endorsed what many will argue comes very close to a judicial "smell test."

The future of GAAR now lies in the hands of two remaining judges of the Supreme Court: the most senior – Chief Justice McLachlin, and the most junior – Justice Cromwell (appointed December 22, 2008). Until the Court revisits GAAR there is no way of knowing how Chief Justice McLachlin and Justice Cromwell will approach these issues. While there is some reason to think that Chief Justice McLachlin may lean more in the direction of Justice Binnie’s "consistency, predictability and fairness" analysis, we as yet know nothing of Justice Cromwell’s approach to income tax issues.

Link to Lipson judgment: