Anti-avoidance Rules

GST/HST Memorandum 16-4
July 2024

This version replaces the one dated March 2016. This memorandum has been updated to reflect amendments made to the New Harmonized Value-added Tax System Regulations. In particular, the addition of new anti-avoidance rules relating to the public service body rebate rate change for charities and qualifying non-profit organizations resident in Prince Edward Island.

Except as otherwise noted, all statutory references in this publication are to the provisions of the Excise Tax Act (ETA), and all references to the Regulations are to the New Harmonized Value-added Tax System Regulations. The information in this publication does not replace the law found in the ETA and its regulations.

If this information does not completely address your particular situation, you may wish to refer to the ETA or relevant regulation, or call GST/HST Rulings at 1‑800‑959‑8287 for additional information. If you require certainty with respect to any particular GST/HST matter, you may request a ruling. GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, explains how to obtain a ruling or an interpretation and lists the GST/HST rulings centres.

If you are located in Quebec and wish to request a ruling related to the GST/HST, please call Revenu Québec at 1‑800‑567‑4692. You may also visit the Revenu Québec website at revenuquebec.ca to obtain general information.

For listed financial institutions that are selected listed financial institutions (SLFIs) for GST/HST or Quebec sales tax (QST) purposes or both, whether or not they are located in Quebec, the CRA administers the GST/HST and the QST. If you wish to make a technical GST/HST or QST enquiry related to SLFIs, please call 1‑855‑666‑5166.

GST/HST rates

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province.

Table of Contents

• General
• General anti-avoidance provision
  • Anti-avoidance rules – GST/HST rate changes
• Anti-avoidance rules relating to harmonization – Part 2 of the New Harmonized Value-added Tax System Regulations
  • Application
  • Variation of agreement – new harmonized province
  • Variation of agreement – change in tax rate
  • Harmonization event – transactions
• Anti-avoidance rules relating to the provincial public service body rebate for municipalities in Newfoundland and Labrador – Part 3.2 of the New Harmonized Value-added Tax System Regulations
• Anti-avoidance rules relating to the provincial public service body rebate for charities and qualifying non-profit organizations in Prince Edward Island – Part 3.6 of the New Harmonized Value-added Tax System Regulations

General

1. The Excise Tax Act (ETA) and the New Harmonized Value-added Tax System Regulations (Regulations) contains anti‑avoidance rules which are intended to prevent persons from benefitting from abusive tax-avoidance transactions and arrangements undertaken for the purpose of avoiding, reducing or deferring the payment of tax, or increasing a refund, rebate or other amount. These rules are not intended to interfere with transactions undertaken or arranged primarily for legitimate purposes.

2. If a transaction is inconsistent with the overall spirit and intent of the ETA, then an anti-avoidance rule may apply. For example, transactions that rely upon the strict wording of a provision in the ETA to gain a benefit where none was intended and, therefore, defeat the purpose of the provision, may be subject to the anti-avoidance rules.

General anti-avoidance provision

3. Section 274 provides the general anti-avoidance rule that applies to all persons.

4. For purpose of the application of section 274, the following terms are defined in subsection 274(1):

• tax benefit means a reduction, an avoidance or a deferral of tax or other amount payable under Part IX or an increase in a refund or rebate of tax or other amount under Part IX
• tax consequences to a person means the amount of tax, net tax, input tax credit, rebate or other amount payable by, or refundable to, the person under Part IX, or any other amount that is relevant to the purposes of computing that amount
• transaction includes an arrangement or event

5. Where a transaction is an avoidance transaction, subsection 274(2) provides that the tax consequences to a person will be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for section 274, would result, directly or indirectly, from that transaction or from a series of transactions that include that transaction.

6. Under subsection 274(3), an avoidance transaction is a transaction that alone, or as part of a series of transactions, would result directly or indirectly in a tax benefit were it not for section 274, unless the transaction can reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

7. Subsection 274(4) provides that subsection 274(2) does not apply in respect of a transaction where it may reasonably be considered that the transaction would not result, directly or indirectly, in a misuse of the provisions of Part IX or in an abuse of Part IX (other than section 274) read as a whole. In this respect, tax planning or transactions that are carried out for purposes other than obtaining tax benefits but which minimize the payment of tax, when compared to other transactions which would achieve the same purpose but which would result in higher tax liability, may not be considered to be avoidance transactions.

8. Under subsection 274(5), where subsection 274(2) applies, any of the following actions, without restricting the generality of subsection 274(2), may be taken into account in determining the tax consequences to a person that are reasonable in the circumstances in order to deny the tax benefits resulting, directly or indirectly, from an avoidance transaction:

• any input tax credit or any deduction in computing tax or net tax payable may be allowed or disallowed, in whole or in part
• any such credit or deduction may be allocated, in whole or in part, to any person
•  the nature of any payment or other amount may be recharacterized
• the tax effects that would otherwise result from the application of other provisions of Part IX may be ignored

9. In accordance with subsection 274(6), where the general anti-avoidance rule applies to a particular transaction under subsection 274(2) and a notice of assessment, reassessment or additional assessment has been sent to a person in respect of that transaction, any other person may, within 180 days after the sending of the notice, request in writing an assessment, reassessment or additional assessment to apply subsection 274(2) to that same avoidance transaction.

10. Under subsection 274(7), notwithstanding any other provision of Part IX, the determination of the tax consequences to any person, resulting from the application of section 274, will only be made through a notice of assessment, reassessment or additional assessment. A person cannot use subsection 274(2) to revise their tax payable or any other amount without requesting an adjustment under the procedure outlined in subsection 274(6).

11. In accordance with subsection 274(8), upon receipt of a request by a person under subsection 274(6), the Minister will consider the request with all due dispatch and assess, reassess or make an additional assessment with respect to the person to the extent that the assessment, reassessment or additional assessment may reasonably be regarded as relating to the avoidance transaction of another person. The Minister is not restricted to the four-year time limit in subsections 298(1) and (2) when considering a request made under subsection 274(6).

Anti-avoidance rules – GST/HST rate changes

12.  Section 274.2 contains an anti-avoidance rule to prevent persons from improperly taking advantage of a change in the rate of tax imposed under Part IX.^{Footnote 1}

13. For purposes of section 274.2, the following terms are defined in subsection 274.2(1):

• person does not include a consumer (a consumer is defined in subsection 123(1) and is generally an individual who receives property or service for personal consumption, use or enjoyment and not for consumption, use or supply in a commercial activity or for making exempt supplies)
• rate change means any change in any rate of tax imposed under Part IX
• tax benefit means a reduction, an avoidance or a deferral of tax or other amount payable under Part IX, or an increase in a refund or rebate of tax or other amount under Part IX
• transaction includes an arrangement or event

14. Subsection 274.2(2) provides that the amount of tax, net tax, input tax credit, rebate or other amount payable by, or refundable to, one or more of the persons involved in the following transaction or series of transactions, or any other amount relevant to computing that amount, is to be determined by the Minister as is reasonable in the circumstances in order to deny the tax benefit to any of those persons, where all of the following conditions are met:

• a transaction, or a series of transactions, involving property is made between two or more persons, all of whom are not dealing with each other at arm's length at the time any of the transactions are made
• the transaction, any transaction in the series of transactions or the series of transactions would in the absence of section 274.2, result directly or indirectly in a tax benefit to one or more of the persons involved in the transaction or series of transactions
• it may not reasonably be considered that the transaction, or the series of transactions, has been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit, arising from a rate change, for one or more of the persons involved in the transaction or series of transactions

15. Under subsection 274.2(3), despite any other provision of Part IX, a tax benefit will only be denied under subsection 274.2(2) through an assessment, reassessment or additional assessment.

16. In accordance with subsection 274.2(4), where the anti-avoidance rule applies to a particular transaction under subsection 274.2(2) and a notice of assessment, reassessment or additional assessment has been sent to a person in respect of that transaction, any other person may, within 180 days after the sending of the notice, request in writing an assessment, reassessment or additional assessment to apply subsection 274.2(2) to that same avoidance transaction.

17. In accordance with subsection 274.2(5), upon receipt of a request by a person under subsection 274.2(4), the Minister will consider the request with all due dispatch and assess, reassess or make an additional assessment with respect to the person only to the extent that the assessment, reassessment or additional assessment may reasonably be regarded as relating to the avoidance transaction of another person. The Minister is not restricted to the four-year time limit in subsections 298(1) and (2) when considering a request made under subsection 274.2(4).

Anti-avoidance rules relating to harmonization – Part 2 of the New Harmonized Value-added Tax System Regulations

Application

18. Under section 34 of the Regulations, the anti-avoidance rules in Part 2 of the Regulations apply despite any provision of the ETA.

Variation of agreement – new harmonized province

19. Section 35 of the Regulations provides an anti-avoidance rule where all of the following conditions are met:

• an agreement for a taxable supply of property or a service (original agreement) is entered into between a supplier and a recipient at any time before the harmonization date for a participating province
• the supplier and the recipient at a later time either directly or indirectly
  • vary or alter the original agreement, or
  • terminate the original agreement and one or more new agreements are entered into with each other or with other persons and under the new agreements the supplier supplies, and the recipient receives, one or more supplies that includes all or substantially all of the property or service that was to have been provided under the original agreement
• the supplier, recipient and, where applicable, the other persons are not dealing with each other at arm's length at the time the original agreement is entered into or at the later time when that agreement is varied or altered or when the new agreements are entered into
• under the original agreement, the provincial part of the HST would have been calculated at the tax rate of the participating province on all or part of the value of the consideration for the supply attributable to the property or service
• under the varied, altered or new agreements, the provincial part of the HST, in the absence of section 35, would not apply to, or would be calculated at a lesser rate on, any part of the value of the consideration for the supply attributable to any part of the property or service
• it may not reasonably be considered for both the supplier and the recipient that these varied, altered or new agreements have been undertaken or arranged primarily for bona fide purposes other than to, directly or indirectly, reduce, avoid or defer tax or any other amount payable under Part IX or benefit in any manner from the participating province becoming a participating province

20. If the above conditions are satisfied, the provincial part of the HST in respect of the supply made under the varied, altered or new agreements will be calculated at the tax rate of the participating province, that is, the rate at which tax would have been calculated in respect of the supply made under the original agreement on any part of the value of the consideration attributable to any part of the property or service.

21. Section 35 of the Regulations applies to any agreement varied, altered or terminated on or after March 26, 2009, and to any new agreement entered into on or after that date.

Variation of agreement – change in tax rate

22. Section 36 of the Regulations provides an anti-avoidance rule where all of the following conditions are met:

• an agreement for a taxable supply of property or a service (original agreement) is entered into between a supplier and a recipient at any time before the particular date on which a change in the tax rate for a participating province applies
• the supplier and the recipient at a later time either directly or indirectly
  • vary or alter the original agreement, or
  • terminate the original agreement and one or more new agreements are entered into with each other or with other persons and under the new agreements the supplier supplies, and the recipient receives, one or more supplies that includes all or substantially all of the property or service that was to have been provided under the original agreement
• the supplier, recipient and, where applicable, the other persons are not dealing with each other at arm's length at the time the original agreement is entered into or at the later time when that agreement is varied or altered or when the new agreements are entered into
• under the original agreement, the provincial part of the HST would have been calculated, on all or part of the value of the consideration for the supply attributable to the property or service, at the tax rate (hereafter referred to as the higher rate) that is the greater of the tax rate of the participating province that applies immediately before the particular date and the tax rate of the participating province that applies on the particular date
• under the varied, altered or new agreements, the provincial part of the HST, in the absence of section 36, would not apply to or would be calculated at a rate lesser than the higher rate on any part of the value of the consideration for the supply attributable to any part of the property or service
• it may not reasonably be considered for both the supplier and the recipient that these varied, altered or new agreements have been undertaken or arranged primarily for bona fide purposes other than to, directly or indirectly, reduce, avoid or defer tax or any other amount payable under Part IX or benefit in any manner from the rate change

23. If the above conditions are satisfied, the provincial part of the HST in respect of the supply made under the varied, altered or new agreements will be calculated at the higher rate, that is, the rate at which tax would have been calculated for supplies made under the original agreement on any part of the value of the consideration attributable to the supply of the property or service made under the varied or new agreement.

24. Section 36 of the Regulations applies to any agreement varied, altered or terminated on or after April 6, 2010, and to any new agreement entered into on or after that date.

Harmonization event – transactions

25. Section 37 of the Regulations contains an anti-avoidance rule to prevent persons from improperly taking advantage of a harmonization event.

26. For purposes of section 37 of the Regulations, the following terms are defined in subsection 37(1):

• harmonization event means the transition by a province to the new harmonized value-added tax system or any change referred to in paragraph 277.1(3)(a) as provincial tax policy flexibility
• person does not include a consumer (a consumer is defined in subsection 123(1) and is generally an individual who receives property or service for personal consumption, use or enjoyment and not for consumption, use or supply in a commercial activity or for making exempt supplies)
• tax benefit means a reduction, an avoidance or a deferral of tax or other amount payable under Part IX or an increase in a refund or rebate of tax or other amount under Part IX
• transaction includes an arrangement or event

27. Subsection 37(2) of the Regulations provides an anti-avoidance rule in respect of the provincial part of the HST where all of the following conditions are met:

• a transaction, or a series of transactions, involving property is made between two or more persons, all of whom are not dealing at arm's length at the time any of the transactions are made
• the transaction, any transaction in the series of transactions, or the series of transactions would in the absence of section 37, result directly or indirectly in a tax benefit to one or more of the persons involved in the transaction or series of transactions
• it may not reasonably be considered that the transaction, or series of transactions, has been undertaken or arranged primarily for bona fide purposes, other than to obtain a tax benefit, arising from a harmonization event, for one or more of the persons involved in the transaction or series of transactions

28. If the above conditions are satisfied, the amount of tax, net tax, input tax credit, rebate or other amount payable by, or refundable to, one or more persons under Part IX that are involved in the transaction or series of transactions, or any other amount relevant for the purposes of computing that amount, is to be determined as is reasonable in the circumstances in order to deny the tax benefit to any of those persons.

29. Section 37 of the Regulations applies to any transaction made on or after March 26, 2009.

30. Under subsection 37(3) of the Regulations, a tax benefit will only be denied under subsection 37(2) through an assessment, reassessment or additional assessment under Part IX.

31. In accordance with subsection 37(4) of the Regulations, where the anti-avoidance rule applies to a particular transaction under subsection 37(2) and a notice of assessment, reassessment or additional assessment has been sent to a person in respect of that transaction, any other person may, within 180 days after the sending of the notice, request in writing an assessment, reassessment or additional assessment to apply subsection 37(2) to that same avoidance transaction.

32. In accordance with subsection 37(5) of the Regulations, upon receipt of a request by a person under subsection 37(4), the Minister will consider the request with all due dispatch and assess, reassess or make an additional assessment with respect to the person to the extent that the assessment, reassessment or additional assessment may reasonably be regarded as relating to the avoidance transaction of another person. The Minister is not restricted to the four-year time limit in subsections 298(1) and (2) when considering a request made under subsection 37(4) of the Regulations.

Anti-avoidance rules relating to the provincial public service body rebate for municipalities in Newfoundland and Labrador – Part 3.2 of the New Harmonized Value-added Tax System Regulations

33. Section 58.47 of the Regulations contains an anti-avoidance rule to prevent municipalities resident in Newfoundland and Labrador from improperly taking advantage of an increase in the public service bodies' (PSB) rebate rate applicable to municipalities in that province.

34. Where this anti-avoidance rule applies, the municipality's PSB rebate of the provincial part of the HST payable on the acquisition of the property involved will be reduced. This reduction will also impact the basic tax content of the property, as the definition of basic tax content takes into account the PSB rebate that a person is entitled to claim, or that the person would have been entitled to claim if the property had been acquired for use exclusively in activities that are not commercial activities.

35. For purposes of section 58.47 of the Regulations, the following terms are defined in subsection 58.47(1):

• initial supply of a property by a person means:
  • if any supply by way of sale of the property was made by the person after July 15, 2015, but before 2016, the last supply by way of sale of the property made by the person before 2016
  • in any other case, the first supply by way of sale of the property made by the person after 2015
• rebate entitlement means the amount of a rebate that a person is entitled to claim under section 259 in respect of an acquisition of property or that the person would have been so entitled to claim if the property had been acquired for use exclusively in activities that are not commercial activities (in this memorandum, rebate entitlement will be referred to as the PSB rebate)
• specified portion of the basic tax content at any time, of property of a person means the amount that would be the basic tax content, as defined in subsection 123(1), of the property at that time if only amounts of tax under subsection 165(2), sections 212.1 and 218.1 and Division IV.1 of Part IX were included in determining that basic tax content
• specified tax means an amount of tax payable under subsection 165(2), section 212.1 or 218.1 or Division IV.1 of Part IX (in this memorandum, specified tax will be referred to as the provincial part of the HST)

36. For claim periods ending after 2015, subsection 58.47(2) of the Regulations requires that a person's PSB rebate of the provincial part of the HST payable on the acquisition of property by the person after the person last made a supply of the property by way of sale be adjusted. The anti-avoidance rule in subsection 58.47(2) applies where all of the following conditions are met:

• the property is property of the person at any time before 2017
• the person makes a particular taxable supply by way of sale of the property after July 15, 2015
• the person is the recipient of another taxable supply of the property (referred to as the reacquisition) after the time at which the particular taxable supply was made and the provincial part of the HST becomes payable in respect of the reacquisition, or is paid without having become payable, on a particular day that is after 2015
• on the last day of the claim period of the person that includes the particular day, or on the last day of the person's fiscal year that includes that claim period, the person is a municipality [including a designated municipality where the property is designated municipal property as defined in subsection 123(1)]
• the particular taxable supply and the reacquisition of the property are part of a transaction or series of transactions that may not reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to, directly or indirectly, benefit in any manner from a change made to the PSB rebate rate applicable to municipalities resident in Newfoundland and Labrador

37. Under subsection 58.47(3) of the Regulations, if the above conditions are met, the person's PSB rebate of the provincial part of the HST will be adjusted in accordance with the following rules:

a) if the reacquisition is a supply by way of sale, the PSB rebate of the provincial part of the HST is reduced by the amount determined by the formula:

b) if the reacquisition is a supply made otherwise than by way of sale, one of the following applies:

1. if the total (referred to as the total tax) of all amounts, each of which is an amount of the provincial part of the HST in respect of an acquisition of the property by the person after the person last made a supply of the property by way of sale that becomes payable, or is paid without having become payable, during the claim period, is less than the specified portion of the basic tax content of the property at the time at which the initial supply of the property was made, the PSB rebate of the provincial part of the HST is nil
2. if subparagraph (i) does not apply and the total tax minus the amount that would be the PSB rebate of the provincial part of the HST in the absence of subparagraph 58.47(3)(b)(ii) is less than the specified portion of the basic tax content of the property at the time at which the initial supply of the property was made, the PSB rebate of the provincial part of the HST is the amount determined by the formula:

38. Section 58.47 of the Regulations is deemed to have come into force on July 15, 2015.

Anti-avoidance rules relating to the provincial public service body rebate for charities and qualifying non-profit organizations in Prince Edward Island – Part 3.6 of the New Harmonized Value-added Tax System Regulations

39. Section 58.63 of the Regulations contains an anti-avoidance rule to prevent charities and qualifying non-profit organizations resident in Prince Edward Island from improperly taking advantage of an increase in the PSB rebate rate applicable to charities and qualifying non-profit organizations in that province.

40. Where this anti-avoidance rule applies, a charity's or a qualifying non-profit organization's PSB rebate of the provincial part of the HST payable on the acquisition of the property involved will be reduced. This reduction will also impact the basic tax content of the property, as the definition of basic tax content takes into account the PSB rebate that a person is entitled to claim, or that the person would have been entitled to claim if the property had been acquired for use exclusively in activities that are not commercial activities.

41. For purposes of section 58.63 of the Regulations, the following terms are defined in subsection 58.63(1):

• initial supply of a property by a person means:
  • if any supply by way of sale of the property was made by the person after February 24, 2022, but before 2023, the last supply by way of sale of the property made by the person before 2023
  • in any other case, the first supply by way of sale of the property made by the person after 2022
• rebate entitlement means the amount of a rebate that a person is entitled to claim under section 259 in respect of an acquisition of property or that the person would have been so entitled to claim if the property had been acquired for use exclusively in activities that are not commercial activities (in this memorandum, rebate entitlement will be referred to as the PSB rebate)
• specified portion of the basic tax content at any time, of property of a person means the amount that would be the basic tax content, as defined in subsection 123(1), of the property at that time if only amounts of tax under subsection 165(2), sections 212.1 and 218.1 and Division IV.1 of Part IX were included in determining that basic tax content
• specified tax means an amount of tax payable under subsection 165(2), section 212.1 or 218.1 or Division IV.1 of Part IX (in this memorandum, specified tax will be referred to as the provincial part of the HST)

42. For claim periods ending after 2022, subsection 58.63(2) of the Regulations requires that a person's PSB rebate of the provincial part of the HST payable on the acquisition of property by the person after the person last made a supply of the property by way of sale be adjusted. The anti-avoidance rule in subsection 58.63(2) applies where all of the following conditions are met:

• the property is property of the person at any time before 2023
• the person makes a particular taxable supply by way of sale of the property after February 24, 2022
• the person is the recipient of another taxable supply of the property (referred to as the reacquisition) after the time at which the particular taxable supply was made and the provincial part of the HST becomes payable in respect of the reacquisition, or is paid without having become payable, on a particular day that is after 2022
• on the last day of the claim period of the person that includes the particular day, or on the last day of the person's fiscal year that includes that claim period, the person is a charity as defined in subsection 259(1) or a qualifying non-profit organization within the meaning of subsection 259(2)
• the particular taxable supply and the reacquisition of the property are part of a transaction or series of transactions that may not reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to, directly or indirectly, benefit in any manner from a change made to the PSB rebate rate applicable to charities and qualifying non-profit organizations resident in Prince Edward Island

43. Under subsection 58.63(3) of the Regulations, if the above conditions are met, the person's PSB rebate of the provincial part of the HST will be adjusted in accordance with the following rules:

a) if the reacquisition is a supply by way of sale, the PSB rebate of the provincial part of the HST is reduced by the amount determined by the formula:

b) if the reacquisition is a supply made otherwise than by way of sale, one of the following applies:

1. if the total (referred to as the total tax) of all amounts, each of which is an amount of the provincial part of the HST in respect of an acquisition of the property by the person after the person last made a supply of the property by way of sale that becomes payable, or is paid without having become payable, during the claim period, is less than the specified portion of the basic tax content of the property at the time at which the initial supply of the property was made, the PSB rebate of the provincial part of the HST is nil
2. if subparagraph (i) does not apply and the total tax minus the amount that would be the PSB rebate of the provincial part of the HST in the absence of subparagraph 58.63(3)(b)(ii) is less than the specified portion of the basic tax content of the property at the time at which the initial supply of the property was made, the PSB rebate of the provincial part of the HST is the amount determined by the formula:

44. Section 58.63 of the Regulations is deemed to have come into force on February 24, 2022.

Further information