|
Federal Tax - General Anti-avoidance Rule (GAAR) (3). Canada v. DAC Investment Holdings Inc.
In Canada v. DAC Investment Holdings Inc. (Fed CA, 2026) the Federal Court of Appeal allowed a Crown appeal, this brought against the Tax Court's allowing an appeal of an MNR income tax reassessment regarding "tax measures applicable to Canadian-controlled private corporations (CCPCs) that minimize any tax deferral advantage arising from holding investments through a corporation".
Here the court considers the 'general anti-avoidance rule' [GAAR], particularly the third step as to whether the impugned transaction was 'abusive':[20] The GAAR scheme was succinctly described in Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 [Copthorne]: "“Where a transaction is an avoidance transaction (a transaction that would result in a tax benefit and whose primary purpose was to obtain the tax benefit), the tax benefit resulting from the transaction will be denied. However, the tax benefit will not be denied if the avoidance transaction would not result in an abuse or misuse of the ""Income Tax Act”" (at para. 32).
[21] The GAAR determination may be divided into three distinct steps: (1) Was there a tax benefit? (2) Was the transaction giving rise to the tax benefit an avoidance transaction? (3) Was the avoidance transaction giving rise to the tax benefit abusive? (Deans Knight Income Corp. v. Canada, 2023 SCC 16 at para. 51 [Deans Knight]).
[22] In this appeal, only the third step is at issue. The parties agree that there is a tax benefit and two avoidance transactions, as described in the ASF above at paragraphs 28 and 30.
[23] The Supreme Court has identified specific circumstances that will lead to a finding of abuse—the avoidance transactions will be abusive where the outcome or result of those transactions (a) is an outcome that the provisions relied on seek to prevent; (b) defeats the underlying rationale of the provisions relied on; or (c) circumvents certain provisions in a manner that frustrates the object, spirit and purpose of those provisions (Deans Knight at para. 69).
....
C. Were the avoidance transactions abusive?
(1) Introduction
[30] The legal principles concerning abuse are well known. In general, a court must, first, determine the object, spirit and purpose of the relevant provisions and, second, determine whether the result of the transactions fell within or frustrated that object, spirit and purpose (Deans Knight at para. 56; Copthorne at paras. 69, 71).
(2) Object, spirit and purpose of relevant provisions
[31] The first stage in the abuse analysis is to determine the object, spirit and purpose of the provisions that are relied on for the tax benefit. In this case, the relevant provisions related to issue (b) are the anti-deferral measures in sections 123.3 and 123.4, and subsection 250(5.1) of the ITA.
[32] This stage raises an extricable question of law, subject to correctness review (Deans Knight at para. 78).
....
(a) Introduction
[57] The GAAR is not applicable unless it may reasonably be considered that an avoidance transaction would result in a misuse or abuse of provisions of the ITA (s. 245(4) of the ITA). The provision reads:Application of subsection (2)
Application du par. (2)
(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction
(4) Le paragraphe (2) ne s’applique qu’à l’opération dont il est raisonnable de considérer, selon le cas :
(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of
a) qu’elle entraînerait, directement ou indirectement, s’il n’était pas tenu compte du présent article, un abus dans l’application des dispositions d’un ou de plusieurs des textes suivants :
(i) this Act,
(i) la présente loi,
(ii) the Income Tax Regulations,
(ii) le Règlement de l’impôt sur le revenu,
(iii) the Income Tax Application Rules,
(iii) les Règles concernant l’application de l’impôt sur le revenu,
(iv) a tax treaty, or
(iv) un traité fiscal,
(v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or
(v) tout autre texte législatif qui est utile soit pour le calcul d’un impôt ou de toute autre somme exigible ou remboursable sous le régime de la présente loi, soit pour la détermination de toute somme à prendre en compte dans ce calcul;
(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.
b) qu’elle entraînerait, directement ou indirectement, un abus dans l’application de ces dispositions compte non tenu du présent article lues dans leur ensemble. [58] The question in this second stage of the abuse analysis is whether an avoidance transaction falls within or frustrates the identified object, spirit and purpose of the provisions relied on for the tax benefit (Copthorne at para. 71). The avoidance transactions will be abusive where the outcome or result of the transaction (a) is an outcome that the provisions relied on seek to prevent; (b) defeats the underlying rationale of the provisions relied on; or (c) circumvents certain provisions in a manner that frustrates the object, spirit and purpose of those provisions (Deans Knight at para. 69).
[59] This second stage is fact-intensive and reviewable for palpable and overriding error, absent an extricable error of law (3295940 Canada Inc. v. Canada, 2024 FCA 42 at para. 43, leave to appeal to SCC refused, 41252 (November 21, 2024); Deans Knight at para. 121).
....
[61] One of the Tax Court’s central findings in its abuse analysis is that the avoidance transactions are not abusive because Parliament intended that a corporation that is a CCPC may take steps to become a non-CCPC. The Tax Court’s conclusion is set out below:[226] ... Prior to being continued in the British Virgin Islands, the Appellant was on one side of the dividing line and, after it was continued, it was on the other side of the dividing line. This is exactly what Parliament intended. As just discussed, Parliament recognized that a corporation could move from one side of the dividing line to the other. It enacted provisions to facilitate this movement. [62] To put it starkly, the Tax Court suggests that Parliament intended that subsection 250(5.1) of the ITA may be used to circumvent anti-deferral measures that are a critical part of longstanding Canadian tax policy.
[63] The Tax Court supports its conclusion by noting that Parliament enacted certain provisions to facilitate movement from being a CCPC to a non-CCPC.
[64] It may be that Parliament enacted certain provisions to facilitate movement in specified cases. However, even if Parliament recognizes that generally a corporation may take steps to cease to be a CCPC, this does not mean that the GAAR cannot apply on the facts of a particular case. The Tax Court erred in law when it effectively determined otherwise. As noted in Copthorne at paragraph 66, "“While the taxpayer’s transactions will be in strict compliance with the text of the relevant provisions relied upon, they may not necessarily be in accord with their object, spirit or purpose. In such cases, the GAAR may be invoked by the Minister.”"
[65] Another of the Tax Court’s central findings is that DAC did not abuse the provisions at issue because it "“chose to move from one taxing regime with its pluses and minuses to another taxing regime with different pluses and minuses”" (reasons at para. 223). On the minus side, the Tax Court listed several favourable provisions in the ITA which applied to DAC when it was a CCPC but no longer applied to DAC following its continuation in the BVI (reasons at para. 224).
[66] Although DAC may have theoretically been subject to minuses, this does not mean that this factor should be taken into account in the factually-suffused abuse analysis. It is only relevant if the minuses were material to DAC.
[67] DAC’s counsel suggested in argument that they were material because DAC had suffered from a longer reassessment period and the GAAR reassessment actually occurred within that longer period. I am not persuaded that DAC had an adverse consequence because of this. Nor am I persuaded that potential minuses were material at all.
[68] Finally, even if there were minuses to the continuation, DAC acknowledges that the two transactions in question were undertaken to obtain tax benefits. It is not plausible that the transactions would have been undertaken if DAC considered that the minuses outweighed the pluses.
[69] In summary, the pluses and minuses were an irrelevant factor in this case and the Tax Court erred by concluding that there was abuse on this basis.
[70] The Tax Court’s finding that there was no abuse of the anti-deferral measures cannot stand in light of these errors. In addition, the finding that there was no abuse of subsection 250(5.1) is owed no deference because the Tax Court did not correctly state the provision’s object, spirit and purpose, as I explained above.
[71] Accordingly, I will undertake a fresh analysis of whether the avoidance transactions abuse these provisions.
[72] First, there was an abuse of subsection 250(5.1). The object, spirit and purpose of this provision is to make tax provisions fairer for corporations moving into or leaving Canada by way of continuance. DAC’s continuance fell outside of and frustrated this object, spirit and purpose.
[73] The continuance into the BVI had nothing to do with developing ties or business interests in the BVI. DAC remained a resident of Canada because its central management and control remained in Canada (reasons at para. 175). Further, aside from obtaining the tax benefits, DAC’s continuance into the BVI is virtually inconsequential. The Certificate of Continuance provides that DAC is continued in the BVI as a company incorporated under the BVI Companies Act. There is no reason to think this is material to DAC other than the tax benefits.
[74] The use of subsection 250(5.1) was simply the means to achieve tax benefits. This was not the object or purpose of this provision.
[75] Turning to the anti-deferral measures in sections 123.3 and 123.4, these provisions have also been abused. The result of the continuance circumvents the anti-deferral provisions in a manner that frustrates the object, spirit and purpose of the provisions.
[76] I agree with the Crown when it says that if one can so easily obtain tax benefits by circumventing anti-deferral measures, the effectiveness of these measures is severely eroded. As mentioned earlier, Canada’s system of taxing investment income of CCPCs ensures that tax is not deferred. In this case, the anti-deferral measures become elective in practice because they were circumvented so easily. Parliament did not intend this result.
[77] In summary, the Tax Court erred in finding that the GAAR did not apply. I find that the GAAR does apply. The continuance of DAC to the BVI was used as a means to circumvent the relevant anti-deferral measures. The transaction fell outside and frustrated the rationale of subsection 250(5.1). The anti-deferral measures in sections 123.3 and 123.4 of the ITA were also abused because the transactions defeated the anti-deferral rationale of these provisions. . Canada v. Quebecor Inc.
In Canada v. Quebecor Inc. (Fed CA, 2025) the Federal Court of Appeal dismisses a Crown appeal, this brought against a ruling where "the Crown, as representative of the Minister, had failed to discharge its burden of establishing that the transactions in question were abusive".
Here the court considers the SOR for appeals regarding the general anti-avoidance rule (GAAR):[39] The standard of review in matters involving the general anti-avoidance rule depends on the stage of the abuse analysis that a party contests. There are two stages to the abuse analysis. The first involves ascertaining the object, spirit, and purpose of the provisions at issue. This is a question of law, requiring appellate courts to apply the standard of correctness: Deans Knight at para. 78; Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 at para. 50; Trustco at para. 44; Housen v. Nikolaisen, 2002 SCC 33 at paras. 8, 26–37. The second stage involves determining whether the transactions at issue are abusive. This analysis is "“necessarily fact‑intensive”" and is therefore subject to review only where there has been a palpable and overriding error, absent an extricable error of law: Deans Knight at para. 121; Trustco at para. 44; Canada v. Oxford Properties Group Inc., 2018 FCA 30 at para. 39; Housen at para. 10.
|
