The sham doctrine is a common-law principle that allows a court to disregard the legal form of a transaction where the parties created documents intended to mislead others about the true legal rights and obligations they actually agreed to. A sham is not merely aggressive planning; it requires an element of deception — an attempt to present a false picture of the legal relationships.
In tax disputes, the Canada Revenue Agency may argue that an arrangement is a sham so that the real transaction, rather than the paper one, is taxed. The doctrine is narrow: a transaction that genuinely creates the rights it purports to create is not a sham simply because it was motivated by tax savings. Distinguishing a sham from legitimate planning that the general anti-avoidance rule might still reach is often a central issue.