DAC Investment – Federal Court of Appeal finds that it was an abuse of s. 250(5.1) and of ss. 123.3 and 123.4 for a CCPC to continue to BVI before realizing a capital gain

With a view to its imminent disposition of the shares of a subsidiary, the taxpayer continued to the British Virgin Islands. As a result, it ceased to be a Canadian-controlled private corporation (CCPC) and became a private corporation that was not a CCPC, with its central management and control remaining in Ontario.

In reversing the Tax Court, Woods, J.A., confirmed CRA's reassessment made on the basis that the resulting non-application of the imposition of refundable tax under s. 123.3, and of accessing the rate reduction under s. 123.4, on the taxable capital gain on the sale was an abuse of those provisions and of the continuance rule in s. 250(5.1).

In particular, the continuance rule was intended to make “tax provisions fairer for corporations moving into or leaving Canada by way of continuance” (para. 72), whereas, here, the continuance had an “inconsequential” business effect (para. 73) and served mostly to abuse an “anti-deferral” rationale of ss. 123.3 and 123.4, namely, ensuring that “investment income should be taxed the same whether it is received directly or through a private corporation” (para. 46).

Woods J.A. also rejected a submission by the taxpayer that it was reasonable to apply s. 245(2) on the basis that the reassessment period for the taxpayers should be the normal reassessment period for a CCPC, i.e., three years rather than four, so that the reassessment at issue was statute-barred. She indicated that the legislative history of the GAAR rule demonstrated that it had been narrowed to only deny tax benefits that resulted from the avoidance transactions, rather than to produce any other results that might be considered reasonable in the circumstances.

Neal Armstrong. Summary of Canada v. DAC Investment Holdings Inc., 2026 FCA 35 under s. 245(4).