The Income Tax Act contains a general anti-avoidance rule (GAAR) in section 245. Consider each of the following situations and determine whether the GAAR will likely apply. Income tax reference: ITA 245(1),(2),(3),(4); IC 88-2.
1. Chris transferred her consulting business to a corporation primarily to obtain the benefit of the low corporate tax rate.
2. Paul owns 100% of the shares of P Ltd. Paul provides services to P Ltd. In the current year he received no remuneration for his services because the payment of a salary to Paul would increase the amount of the loss that P Ltd. will incur in the year.
3. A Canadian-controlled private corporation pays its shareholder/manager a bonus that will reduce the corporation’s income to the amount eligible for the low tax rate. The bonus is not in excess of a reasonable amount.
4. A profitable Canadian corporation has a wholly owned Canadian subsidiary that is sustaining losses and needs additional capital to carry on its business. The subsidiary could borrow the funds from its bank but could not obtain any tax saving in the current year by deducting the interest expense due to its loss situation. Therefore, the parent corporation borrows the funds from its bank and subscribes for additional common shares of the subsidiary. The parent corporation reduces its taxable income by deducting the interest expense. The subsidiary uses the funds to earn income from its business.