Research Paper Number



Risk-Based Overrides of Share Ownership as Specific Anti-Avoidance Rules

Published in Canadian Tax Journal/Revue Fiscale Canadienne, 63.2 (2015): 397-465.

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Risk; tax avoidance; hedging; derivatives; shares; ownership


This article conceptualizes recently enacted legislation addressing "derivative forward agreements" (DFAs) and "synthetic disposition arrangements" (SDAs), as well as the subsequently proposed provisions addressing "synthetic equity arrangements" (SEAs), as examples of specific anti-avoidance rules that are risk-based overrides of the concept of share ownership for private-law purposes in the assignment of income tax attributes. Although these specific anti-avoidance rules address discrete and unrelated transactions, they share some broad design features. Most importantly, they take the form of detailed rules rather than generally expressed standards, and they incorporate risk exposure, either explicitly or implicitly, as a proxy for taxpayer purpose for a range of targeted transactions. The author argues that this set of risk-based overrides of ownership in the Income Tax Act could be recast using a uniform approach to the targeting of each of the relevant transactions. This approach involves the specification of a level of risk exposure explicitly as a percentage amount, which holds the possibility of more accurate targeting -- particularly if the specification is tailored differently for different overrides -- than is currently the case using either imprecise verbal formulas or proxies for risk exposure. Precise specification requires, however, precise measurement of risk exposure, which presents certain practical challenges and suggests some practical limitations. Moreover, boundaries in the tax law that are the source of tax-driven substitution are especially problematic with respect to a bright-line distinction between tax-driven and non-tax-driven positions in property that is characteristic of precise specification and should ideally be backstopped with a purpose-based standard rather than reliance on the general anti-avoidance rule in section 245 of the Act. The author suggests that, despite skepticism in the literature, the financial concept of delta provides a measurement tool that is feasible with positions in traded shares. This potential is not inconsiderable, since traded shares tend to be a particular focus of the relevant set of avoidance transactions addressed by risk-based overrides. For other types of property, including non-traded shares, an imprecise specification of risk exposure using verbal formulas and a purpose-based standard may be used in preference to the existing set of eclectic approaches to the targeting of risk-based overrides as specific anti-avoidance rules.