Saturday, October 27, 2007

GAAR

This is something I did not know:
The GAAR [General Anti-Avoidance Rule] (not GAR) is an overarching rule in the Tax Act that can attack a legitimate tax plan for being a "misuse or abuse" of the rules.

The story revolves around the idea that the interest fees on monies borrowed to invest is tax-deductible, so one could theoretically take out a loan, invest it in a family corporation, and use said corporation to purchase the mortgage - basically an interest-free mortgage.

This does seem like a good loophole to tidy up, but I'd like to make a few points. One, the people the CRA are challenging in court should have their legal fees paid for by the CRA, regardless of outcome. As of right now, they're not doing anything illegal.

More interestingly from an economic point of view, is this sort of 'creative destruction' in the tax system a good thing? Suppose we paid out money to people who came forward with holes in the tax system. I have a strong feeling this would pay for itself several times over. Full disclosure: I have never taken a course in public finance.

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