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Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, is the Supreme Court’s first major ruling on the general anti-avoidance rule (GAAR). The Court held GAAR did not apply, so the company kept a $31,196,700 capital cost allowance claim for 1997 that the CRA had denied. Judgment came out on October 19, 2005.
What happened in the Canada Trustco case?
In December 1996 a mortgage lender, Canada Trustco Mortgage Company (CTMC), bought a batch of trailers from Transamerica Leasing at their fair market value of $120 million, using its own money and a loan of about $100 million from the Royal Bank. It leased the trailers to a company called Maple Assets, which subleased them straight back to Transamerica, the original owner. The paper trail went in a circle. For its 1997 tax year, CTMC claimed a capital cost allowance (CCA) deduction of $31,196,700, which is the tax version of depreciation, against its other leasing income.
The Minister of National Revenue reassessed 1997 and denied the claim. The Minister first argued that CTMC never got title to the trailers, but later dropped that argument and relied on GAAR alone. The Tax Court of Canada set the reassessment aside on May 7, 2003, and the Federal Court of Appeal dismissed the Crown’s appeal on February 11, 2004. The Supreme Court heard the case on March 8, 2005 and dismissed the appeal with costs.
Why does a deal like this matter if you don’t own a fleet of trailers? Because the decision set out how the CRA and the courts must test any arrangement the CRA calls abusive, and that test still shapes everyday tax planning.
| Item | Detail |
|---|---|
| Case | Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601 |
| Court and date | Supreme Court of Canada, October 19, 2005 |
| Companion case | Mathew v. Canada, 2005 SCC 55 |
| Amount at stake | $31,196,700 of capital cost allowance for 1997 |
| Result | Appeal dismissed, GAAR did not apply |
The Supreme Court’s case page (docket 30290) confirms the dates, the $31,196,700 reassessment and the outcome.
How does the general anti-avoidance rule work under section 245?
GAAR sits in section 245 of the Income Tax Act. A tax benefit is defined there as a reduction, avoidance or deferral of tax or other amount payable. Where it applies, the tax results are worked out as is reasonable in the circumstances to deny the benefit.
The Court read it as a three-step test. Here’s the order, in plain words.
| Step | What it asks | Who carries the burden |
|---|---|---|
| Tax benefit | Did the transaction, or a series of them, produce a tax benefit? | The taxpayer has to refute it |
| Avoidance transaction | Was it an avoidance transaction under s. 245(3), meaning it wasn’t arranged primarily for real purposes other than getting the tax benefit? | The taxpayer has to refute it |
| Misuse or abuse | Does the result misuse the provisions, or abuse them read as a whole (s. 245(4))? | The Minister has to establish it |
In this case the Crown accepted the Tax Court’s finding that there was a tax benefit and an avoidance transaction, so everything turned on the third step. The Court said a judge has to look at the text of the provisions, their context and their purpose together, to work out why the rules exist. A deduction that follows the purpose of the CCA rules isn’t abuse just because someone planned the deal to save tax. The Court found this deal wasn’t so different from an ordinary sale-leaseback as to fall outside the purpose of the CCA provisions.
Is tax avoidance planning allowed after the ruling?
Mostly it means tax planning isn’t a crime. You’re allowed to arrange your affairs to pay less tax, and a lower bill alone doesn’t trigger GAAR. Using your RRSP room or claiming a deduction the law gives you is normal planning.
GAAR still has teeth. If a structure has no purpose other than the tax saving and it produces a result the law wasn’t built to allow, the CRA can use GAAR, and that is the point at which you want a tax lawyer and not a blog post. We’re not offering a view on any real arrangement here.
CCA is the piece most readers might meet. To see how rental income feeds into a tax bill, try the rental income tax calculator. For a company’s own rates, the corporate tax calculator shows a rough combined figure by province, and the capital gains tax calculator covers the other common planning topic, the sale of an asset.
Has section 245 changed since the 2005 ruling?
Yes, and the changes matter. According to the current text on the Justice Laws website (checked in November 2026), section 245 now includes the following.
- A preamble in subsection 245(0.1) that says GAAR targets avoidance transactions that misuse or abuse the Act, and balances protecting the tax base with certainty for taxpayers.
- A lower threshold for an avoidance transaction in subsection 245(3): a transaction qualifies unless it may reasonably be considered that obtaining the tax benefit was not one of its main purposes. The Court in 2005 worked with a test that asked whether the transaction was arranged primarily for other purposes.
- An economic substance rule in subsection 245(4.1): if a transaction is significantly lacking in economic substance, that is an important consideration in finding misuse or abuse.
- A penalty in subsection 245(5.1), equal to 25% of the additional tax and certain related amounts, for a transaction that was not disclosed under the reporting rules in sections 237.3 or 237.4.
The page lists the latest amendment as S.C. 2024, c. 15. It does not show application dates, so check the amending Act before you rely on a specific start date. Canada Trustco remains the foundation for how courts read the misuse or abuse step, but a summary of the 2005 test is not a full description of GAAR today.
What did later Supreme Court cases do with the test?
The Court has applied the Canada Trustco framework several times since, with mixed results. These are three well-known examples.
| Case | Year | Outcome in short |
|---|---|---|
| Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 | 2011 | GAAR applied against the taxpayer, abuse of the paid-up capital averaging rule |
| Alta Energy Luxembourg S.A.R.L. v. Canada, 2021 SCC 49 | 2021 | Taxpayer won, treaty exemption could be claimed |
| Deans Knight Income Corp. v. Canada, 2023 SCC 16 | 2023 | GAAR applied, restricting use of non-capital losses |
The point for readers is that GAAR outcomes depend on the facts and on the purpose of the specific provisions. We summarize these cases from law firm and news reports, not from the judgments, so read the decisions themselves before you cite one.
Common misreadings of the decision
One is that Canada Trustco made GAAR toothless. It didn’t. The Court set a test for the rule and found the test wasn’t met on these facts. Later cases apply it, as the earlier part of this page shows.
Another is treating this case as a rule about leases. It wasn’t. The trailers were only the facts. The test is what travels.
A third mistake is reading this page, or any summary, as a substitute for the decision. The full text of 2005 SCC 54 is on the court’s website and CanLII, and it’s the only version that counts. Check the decision itself before you cite it.
Official page on this topic: Justice Laws: Income Tax Act, section 245 (general anti-avoidance rule).
Where we checked this information
Checked in November 2026. The wording of section 245 is from the Income Tax Act on the Justice Laws website, consolidated to October 19, 2026. The facts, dates and outcome come from the Supreme Court of Canada case page and the text of the judgment. This site is not linked with any court or government body, and nothing here is legal advice on a specific plan. To see your own numbers, the income tax calculator is a good place to start.
Frequently asked questions
What did the Supreme Court decide in Canada Trustco?
It held that the general anti-avoidance rule did not apply to the trailer leasing arrangement, so the company kept its $31,196,700 capital cost allowance claim for 1997. The Court dismissed the Crown’s appeal after the Tax Court and the Federal Court of Appeal had also ruled for the company.
When was the decision released?
October 19, 2005. It is cited as 2005 SCC 54 and [2005] 2 S.C.R. 601. A companion case, Mathew v. Canada, 2005 SCC 55, was released the same day. The appeal had been heard on March 8, 2005. The decision is on the Supreme Court’s website.
What is the general anti-avoidance rule?
It is section 245 of the Income Tax Act. It lets the tax results be worked out as is reasonable to deny a tax benefit from an avoidance transaction that misuses or abuses the Act. It has been amended since 2005, so read the current text.
What is the Canada Trustco three-step test?
First, was there a tax benefit. Second, was the transaction an avoidance transaction. Third, does it misuse or abuse the provisions read as a whole. The taxpayer must refute the first two steps, and the Minister must establish the third.
Does saving tax on purpose trigger GAAR?
Not by itself. The third step asks whether the result misuses or abuses the provisions, judged by their text, context and purpose. Using a deduction the law gives you is normal planning, and a lower bill alone does not make an arrangement abusive.
Can I rely on this page as legal advice?
No. Read the decision itself, which is on the Supreme Court’s website, and speak to a tax lawyer about any arrangement where the main point is a tax saving. This page is general information and we do not represent the CRA.