Somerset – Tax Court of Canada finds that a pre-1972 corp did not accomplish any substantive CCPC planning by continuing to BVI before a sale (otherwise, DAC would apply)

The taxpayer, which had been a B.C. corporation and a Canadian resident since its incorporation in 1943, sought to cease being a “Canadian corporation” as defined in s. 89(1) and, thus, to cease qualifying as a CCPC at the time of closing the sale of two Vancouver real estate properties. To this end, it continued to the British Virgin Islands (“BVI”) shortly before such closing, so that it treated the taxable capital gain of $16 million realized on such disposition as not being subject to refundable tax under s. 123.3 and as being eligible for the general rate reduction under s. 123.4.

The definition of "Canadian corporation" at any time referred to a corporation resident in Canada that was:

(a) incorporated in Canada, or

(b) resident in Canada throughout the period that began on June 18, 1971, and that end[ed] at that time.

Para. (a) was not satisfied since, by virtue of the continuance, it was deemed by s. 250(5.1)(a) to have been incorporated in BVI. Although it satisfied para. (b) on a literal basis since it had been continuously resident in Canada, MacPhee J adopted the interpretation in inter alia Saipem that para. (b) would apply only to a corporation not incorporated in Canada. However, s. 250(5.1)(a) deemed the taxpayer to have been incorporated in the BVI for most purposes including para. (b), so that at the disposition time it qualified as a Canadian corporation and, thus, as a CCPC.

If the taxpayer nonetheless had succeeded in ceasing to be a CCPC, then applying DAC, this would have resulted in an abuse of ss. 123.3, 123.4, and 250(5.1) for GAAR purposes. In rejecting the taxpayer's argument that there was no abuse because there was a reasonable alternative transaction—namely, that the taxpayer could have been incorporated in BVI and thereby avoided the tax under s. 123.3 -- MacPhee J accepted the Crown's submission that the alternative transaction must be one that is contemporaneous with the transaction actually undertaken.

Furthermore, the alternative transaction also did not satisfy a requirement, under the five-part test in 3295940 Canada Inc., that it produce tax consequences approximately as favourable as the series at issue. In particular, since under this scenario the taxpayer in fact had been incorporated in BVI and was continuously resident in Canada, it would be a “Canadian corporation” under para. (b) of the definition.

Neal Armstrong. Summaries of Somerset Limited v. The King, 2026 TCC 123 under s. 89(1) – Canadian corporation and s. 245(4).