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D'Arcy v. HMK shows that meeting mechanical requirements is not enough; interpretive precision determines whether a structure holds under scrutiny.
Key Takeaways
- CRA challenges often evolve from mechanical to interpretive tests. The decisive factor is not a structure's mechanics but whether its interpretive elements hold up under scrutiny.
- Meeting the mechanical requirements of legislation ensures compliance; meeting the interpretive requirements determines whether a structure endures under review.
- The degree of control private companies retain under CRA pressure depends on understanding both dimensions, and on how interpretive requirements are reinforced in practice.
The Situation
Two founders reorganized their construction group through a new holding company. The plan created nearly $1 million of paid-up capital on paper, then used that capital to clear shareholder loans tax-free. The CRA applied the GAAR, and the Tax Court agreed – both appeals were denied, with costs fixed at $8,500.
What Made the Difference
The decisive factor wasn't the plan's sophistication, but its purpose made visible. The record showed the goal was to unlock cash tax-free. The Court accepted that the taxpayers may have had a broader business purpose – creditor-proofing – but emphasized that a valid objective does not erase the presence of avoidance transactions.
Intention often becomes the focal point of CRA pressure. When it isn't clarified, tested, and reinforced early, CRA scrutiny defines it instead. In the end, the outcome the structure was designed to achieve overshadowed the taxpayer's stated intention. When the primary purpose was clear, the creditor-proofing rationale no longer carried weight.
The Signal for Business Leaders
D'Arcy v. HMK shows how intention becomes the operative test when CRA scrutiny begins. By moving from mechanical accuracy to assessing taxpayer intention and legislative purpose, the CRA directs the review toward areas where most private companies and structures are least prepared — intention and rationale.
In many private companies, tax structures are built to satisfy the mechanical requirements of legislation rather than the interpretive requirements that determine whether they hold under CRA pressure.
Among private companies, the point of difference lies in how interpretive requirements are reinforced. Some depend on advisors whose work focuses on mechanical elements and ends once the structure is put in place.
Mechanics and form alone seldom hold when tested. The most resilient organizations engage advisors who combine mechanical execution with interpretive depth — helping clarify and strengthen intention as CRA challenges arise. And they extend that discipline internally, using finance leadership and governance routines.
When CRA pressure begins, reinforcement can still occur, though
under different conditions. Organizations that maintain control use
the challenge to clarify intention — not only through
mechanical precision but through structured judgement and credible
reasoning. They create clarity through disciplines designed to make
intention visible under scrutiny.
Across D'Arcy v. HMK and similar cases, differences in
outcome turn on interpretive depth and reinforcement, not on
mechanical precision alone.
Case Reference: D'Arcy v. The King, 2025 TCC 128
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.
