Bogumił Brzeziński, Robert Korgol
Substance over form doctrine and its application in Canadian tax law
Summary
This article deals with the concept of substance over form in general and specifically with the judicial doctrine of substance over form and its application in Canadian tax law. Substance over form is the concept that the information shown in the documents (form) should reflect the underlying realities of transaction (substance). Substance over form doctrine is the doctrine which allows the tax authorities to ignore the legal form of an arrangement and to look to its actual substance in order to prevent artificial structures from being used for tax avoidance purposes. This doctrine amongst many other judicial doctrines was created by courts in the United States as means used to combat tax avoidance.
We begin by analyzing general interpretation concepts and conclude as it is generally viewed in the literature of the subject that the introduction of General Anti Avoidance Rule into Canadian Income Tax Act can be attributed to the fact that Canadian courts tend to favour strict interpretation and were not very active when it comes to combating avoidance. Then several most commonly used judicial doctrines are discussed (economic substance doctrine, sham transaction, business purpose, step transaction doctrine). In section 4 we explore the doctrines which have been or potentially could have been used in Canada. The most important of those are: sham, legally ineffective/incomplete transaction, step transaction, business purpose, economic substance and legal substance over form. The legal substance over form concept is used in situations where the courts examine rights and obligations of the parties to a transaction to determine the true nature of transaction as opposed to relying on the form of the transaction only. The courts do not examine the economic substance of the transaction in this case.
Court decisions in major relevant cases are discussed as they relate to the matter both before the introduction of the General Anti Avoidance Rule and afterwards. The relation between judicial doctrines and GAAR is also explored. It is then concluded that judicial anti-avoidance doctrines are not as widely used by the courts in Canada as they are in the U.S and the general concept of economic substance over form as it is understood in the U.S. (as a sole reason leading to recharacterization of transaction) has been rejected by Canadian courts on many occasions.