There are two forms of tax avoidance:
(1) Lawful tax mitigation; and
(2) “Abusive” tax avoidance.
Tax mitigation refers to lawful avoidance that complies with the tax statute, related materials, and tax treaties. The Westminster principle is the seminal common law authority for tax mitigation. Stubart Investments Ltd. v. Canada, [1985] S.C.J. No. 25, [1984] 1 S.C.R. 536, applied the principle and rejected the business purpose test as a prerequisite for tax sustainability, which started the shift towards the general anti-avoidance rule (GAAR) to control “abusive” tax avoidance.
Abusive tax avoidance is that which undermines the integrity of the tax system by frustrating the object, spirit and purpose of statutory provisions through technical compliance. The underlying focus of the GAAR is on transactions (or series of transactions) that technically comply with the Income Tax Act (“Act”), Regulations, or tax treaties but abuse the integrity of the structure. Thus, abuse requires balancing taxpayer rights under the Westminster principle to plan their affairs in commercially efficient forms in compliance with the statute, whilst maintaining the integrity of the tax system.
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