The general anti-avoidance rule (GAAR) in section 245 of the Income Tax Act is a catch-all provision that can deny a tax benefit obtained through abusive tax avoidance, even where the arrangement complies with the literal wording of the other provisions. It applies where three elements are present: there is a tax benefit; the benefit arises from a transaction or series of transactions; and the transaction is an avoidance transaction whose result misuses or abuses the provisions relied on.
Where the rule applies, the Canada Revenue Agency may redetermine the tax consequences as if the avoidance transaction had not occurred. Amendments effective in recent years lowered the avoidance-transaction threshold, added an economic-substance factor to the abuse analysis, and introduced a penalty. Because GAAR can override otherwise valid planning, the misuse-or-abuse analysis is central to assessing aggressive structures.