Canadian tax court rejects use of GAAR to block corporate expatriation plan

Tuesday, 21 May 2024
The deliberate continuance of a Canadian-controlled private corporation (CCPC) to the British Virgin Islands did not constitute abusive tax planning and does not warrant ministerial use of the general anti-avoidance rule (GAAR), even though the company admitted it was done in order to exit the CCPC tax regime before disposing of corporate shares with an accrued gain.
Sign outside the Tax Court of Canada

This was the Tax Court of Canada’s ruling in DAC Investment Holdings v Canada Revenue Agency (2024 TCC 63). It is the first judicial ruling on the issue, concerning which many other taxpayers have similar disputes in abeyance at Canada Revenue Agency (CRA) appeals.

The company was continued into the BVI in April 2015 in preparation for the sale of shares of a subsidiary. By doing so, it was deemed to be incorporated outside of Canada, and by virtue of no longer being a Canadian corporation its status was changed to a non-CCPC, though its central management and control (and therefore its residence for tax purposes) remained in Canada. Triggering the CAD1.18 million accrued capital gain after the continuance into the BVI gave DAC access to the general rate reduction on what would otherwise be 'aggregate investment income' of a CCPC. It also ceased to be subject to the 10.66 per cent refundable tax on investment income under s.123.3 of the Income Tax Act, and could claim the 13 per cent general rate reduction in respect of its income from all sources under s.123.4(2).

To counter this tax avoidance, the Minister of National Revenue sought to apply the GAAR to tax the company as if it remained a CCPC after the continuance. The company conceded that there was a tax benefit and that the transactions were avoidance transactions but argued that the series of transactions it had undertaken did not abuse the definitions of CCPC or Canadian corporations.

D'Arcy J ruled in favour of the taxpayer. In particular, the court held that taking steps to transfer from one taxing regime to another is not abusive tax avoidance even when done specifically to obtain a tax benefit. Parliament, said D'Arcy, has articulated the rationale underlying its decision to have different sets of rules for different corporations, and that structuring one's affairs to come within a particular regime does not merit the application of the GAAR. The company's move from one side of the dividing line to the other side after being continued into the BVI did not defeat the definition's underlying rationale, rather it was 'exactly what Parliament intended'.

The minister is now expected to appeal the decision to the Federal Court of Appeal, said Stephanie D'Amico of Toronto law firm Aird Berlis. Meanwhile, proposed measures contained in Bill C-59 would deny the tax benefits realized by DAC to similarly situated taxpayers for taxation years ending after April 2022, noted law firm McCarthy Tetrault.


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