Taking the GAAR Too Far: An Analysis of McNichol v. The Queen

The decision of the Tax Court of Canada in McNichol v. The Queen represents the first instance in which the General Anti- Avoidance Rule (the GAAR ), in section 245 of the Income Tax Act, has been judicially applied. The impugned transaction was a classic example of dividend or surplus stripping, which involves the removal of tax paid net profit from a corporation as capital rather than by a distribution of dividends. There are specific anti- avoidance measures within the Act which purport to deal with surplus stripping transactions. The Court, however, chose not to utilize such purpose-built provisions, but relied instead on the expansive ambit of the GAAR. This note will comment on the McNichol decision by first providing a brief outline of the facts, undertaking an analysis of the transaction under the specific subsection 84(2) anti-avoidance provision and, finally commenting on the Court\u27s application of the GAAR. The conclusion of this note is that the presence of specific anti-avoidance rules should preclude the application of the GAAR. This view finds support in previous decisions of the Supreme Court of Canada, and is consistent with the dear intent of Parliament. In the result, the Court\u27s decision to disallow the transaction in McNichol is appropriate, but should have been achieved pursuant to subsection 84(2), a provision particular to the type of transaction at issue, instead of under the section 245 GAAR