DAC Investment Holdings: The Tax Court Of Canada Finds That The General Anti-Avoidance Rule Does Not Apply To An Intentional Change To Non-CCPC Status

McCarthy Tétrault LLP


McCarthy Tétrault LLP provides a broad range of legal services, advising on large and complex assignments for Canadian and international interests. The firm has substantial presence in Canada’s major commercial centres and in New York City, US and London, UK.
On Thursday, May 9th, 2024, the Tax Court of Canada ("TCC") released its decision in DAC Investment Holdings Inc. v. His Majesty the King.
Worldwide Tax
To print this article, all you need is to be registered or login on Mondaq.com.

On Thursday, May 9th, 2024, the Tax Court of Canada ("TCC") released its decision in DAC Investment Holdings Inc. v. His Majesty the King.1 Justice D'Arcy found that the general anti-avoidance rule (the "GAAR") in section 245 of the Income Tax Act (Canada) (the "Act")2 did not apply to the continuance of the Appellant in the British Virgin Islands such that it was no longer a Canadian-controlled private corporation ("CCPC"), concluding that the choice to be taxed as a non-CCPC did not abuse the relevant provisions of the Act.


Prior to April 29, 2015, the Appellant was a CCPC. In anticipation of the disposition of shares of a subsidiary, it continued to the British Virgin Islands on April 29, 2015 and was consequently deemed to be incorporated outside of Canada pursuant to subsection 250(5.1). By virtue of no longer being a "Canadian corporation",3 the Appellant's status was changed from a CCPC to a private corporation that was not a CCPC ("non-CCPC"). Its central management and control, and therefore its residence for tax purposes, remained in Canada. Shortly thereafter, the Appellant sold the shares and realized a taxable capital gain of $1,179,648. As a non-CCPC, among other consequences, the Appellant was no longer subject to the 10 2/3% refundable tax on aggregate investment income imposed by section 123.3 and was entitled to claim the 13% general rate reduction in respect of its income from all sources under subsection 123.4(2).

The Minister of National Revenue applied the GAAR and assessed the Appellant on the basis that its income from the disposition of the shares was subject to the tax in section 123.3 and that it was not entitled to the general rate reduction in section 123.4.

TCC Decision

The Appellant conceded that there was a tax benefit and that the transactions were avoidance transactions. At issue was whether the series of transactions undertaken by the Appellant abused the definition of CCPC in subsection 125(7), the definition of Canadian corporation in subsection 89(1), section 123.3, section 123.4, or subsection 250(5.1).

The TCC concluded that the object, spirit and purpose of both the definition of CCPC and the definition of Canadian corporation is to set out the specific criteria to be met for a corporation to be subject to the taxation regimes applicable to such type of corporation.4 With respect to the definition of CCPC, the court described this rationale as providing a "dividing line" between corporations taxed under the CCPC regime and those that are not.5 That the Appellant was "on one side of the dividing line" prior to being continued in the British Virgin Islands and "on the other side of the dividing line" after it was continued did not defeat the definition's underlying rationale. Rather, it was "exactly what Parliament intended," as evidenced in part by the existence of various transitional rules for changing from CCPC regimes to non-CCPC regimes.6

The TCC found that the object, spirit and purpose of section 123.3, is "to prevent the use of a CCPC to defer taxes that may be payable at a higher rate by the shareholders of the CCPC, while maintaining the integration of taxes paid by CCPCs and their shareholders". The TCC concluded that Parliament intended for the refundable tax regime, of which section 123.3 is a part, to apply only to CCPCs.7

In its decision, the TCC emphasized that for policy reasons, Parliament has chosen to have different taxing regimes for different types of corporations.8 The choice to be taxed as a non-CCPC did not abuse section 123.3 as the provision was only intended to tax investment income earned by CCPCs under that regime.9 The TCC concluded that in choosing to be a non-CCPC rather than a CCPC, the Appellant opted to "move from one taxing regime with its pluses and minuses to another taxing regime with different pluses and minuses."10 Although it avoided the application of section 123.3, it lost access to various benefits only available to CCPCs.11

The TCC went on to find that the object, spirit and purpose of section 123.4 is to lower the general corporate tax rate for competitiveness purposes,12 and the object, spirit and purpose of subsection 250(5.1) is to "equate the place of continuance of a corporation with its place of incorporation in order to ensure that, upon the continuation of a corporation in a different jurisdiction, the various provisions of the Act that refer to the place of incorporation... produce the results intended by Parliament."13 The TCC held that neither of these rationales were defeated or frustrated by the Appellant's avoidance transaction.14

As the object, spirit and purpose of the provisions at issue were not abused by the Appellant's avoidance transaction, the TCC held that the GAAR did not apply and allowed the appeal.


Proposed substantive CCPC measures contained in Bill C-59 would deny the tax benefits realized by the Appellant to similarly situated taxpayers for taxation years ending after April 7, 2022. However, the TCC's decision in DAC Investment Holdings is relevant to the many taxpayers who have similar disputes that are being held in abeyance at Canada Revenue Agency appeals.


1. 2024 TCC 63 ("DAC Investment Holdings").

2. All statutory references herein are to the Act.

3. As defined in subsection 248(1) by reference to subsection 89(1).

4. DAC Investment Holdings, supra note 1 at paras 96 to 99.

5. Ibid. at para 98.

6. Ibid. at paras 214 to 222, 226,

7. Ibid. at paras 131, 139.

8. Ibid. at para 212.

9. Ibid. at para 227.

10. Ibid. at para 223.

11. Ibid. at para 224.

12. Ibid.at para 228.

13. Ibid. at para 229.

14. Ibid. at paras 228 and 231.

To view the original article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More