The Tax Court of Canada ("TCC") recently released the much-anticipated decision in DAC Investment Holdings Inc. v. The King, 2024 TCC 63 ("DAC"). The decision is the first judicial ruling on whether a corporate continuance effected specifically to exit the Canadian-controlled private corporation ("CCPC") tax regime constitutes abusive tax planning.
Specifically, the TCC was asked to decide whether the continuance of a CCPC to the British Virgin Islands prior to the disposition of corporate shares with an accrued gain was subject to the general anti-avoidance rule ("GAAR"). By triggering the gain after the continuance, the taxpayer in DAC gained access to the general rate reduction on what would otherwise be "aggregate investment income" of a CCPC, and also ceased to be subject to Part I refundable tax under section 123.3 of the Income Tax Act. The Minister of National Revenue (the "Minister") sought to apply the GAAR to tax the Appellant as if it remained a CCPC after the continuance.
The TCC ruled in favour of the taxpayer and, in particular, held that taking steps to transfer from one taxing regime to another is not abusive tax avoidance, even when it is done specifically to obtain a tax benefit. Justice D'Arcy found that Parliament 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 (as the Appellant did) does not merit the application of the GAAR.
At this time, it is anticipated that the Minister will appeal the decision to the Federal Court of Appeal.
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