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Sham vs GAAR: What Canadian Businesses Need to Know! 

At Savvy CFO, we believe financial clarity is about more than just numbers. It’s about understanding the rules of the game. One area where business owners often get caught off guard is when the CRA challenges tax planning strategies. Two arguments commonly raised are GAAR (General Anti-Avoidance Rule) and Sham. While they sometimes appear together, they are very different. Here’s what you need to know.

What is “Sham”?

In tax law, a sham occurs when the legal documents or transactions do not reflect the true intentions of the parties. In plain terms, it’s when paperwork is designed to mislead.

  • CRA’s burden of proof: High - they must prove misrepresentation of intent.

  • Risk if proven: Reputational and legal - dishonesty is alleged, not just poor planning.

  • Crown success rate: About 33% overall, but higher (~44%) when argued alone (Goodmans LLP, Canadian Tax Focus, Aug 2025).

What is GAAR?

The General Anti-Avoidance Rule (GAAR) applies when a transaction technically follows the law but misuses or abuses tax rules to gain an unfair benefit.

  • CRA’s burden of proof: Lower - focuses on the purpose and outcome of the arrangement.

  • Risk if applied: Financial - denied tax benefits, reassessment, possible penalties.

  • Crown success rate: Varies, but generally stronger than sham arguments (Goodmans LLP, Canadian Tax Focus, Aug 2025).

Sham vs GAAR: Key Differences

Aspect Sham GAAR
What it targets Misrepresentation of intent (documents don’t match reality) Misuse/abuse of tax rules (even if legal)
CRA burden of proof High Lower
Frequency Used in ~12% of GAAR-related cases ([Goodmans LLP, 2025]) Primary tool in aggressive tax planning disputes
Success rate 33% (higher when argued alone, ~44%) ([Goodmans LLP, 2025]) Generally more successful
Risk for business Legal + reputational (dishonesty alleged) Financial (denied tax benefits, penalties)

What This Means for Canadian Business Owners

  1. Keep documents accurate: agreements, trust deeds, and contracts should reflect how you actually operate.

  2. Consistency matters: if your business acts differently than what the documents say, CRA may allege sham.

  3. GAAR is more common: expect GAAR to be the CRA’s main challenge in aggressive planning.

  4. Sham is rare but serious: if CRA raises sham, it signals they believe there is deliberate misrepresentation.

Final Thought

Sham and GAAR are different tools in the CRA’s playbook. GAAR is about whether your planning crosses the line of acceptable tax avoidance. Sham is about honesty and intent. Both carry risks, but sham carries the heavier reputational weight.

Bottom line: Protect your business by ensuring your legal, financial, and operational records align. If they don’t, you’re inviting CRA scrutiny.

At Savvy CFO, we help businesses stay onside by building financial systems that are both strategically effective and CRA-compliant. If you’d like to discuss how this applies to your situation, let’s connect.