DAC Investment – Tax Court rules that “non-CCPC planning” is not abusive under GAAR

Yesterday, the Tax Court of Canada released its decision in DAC Investment Holdings Inc. v R. Led by Matthew Williams, Florence Sauve, and Brittany Rossler, the decision represents a major win for taxpayers across the country.

In DAC, the appellant took steps to change its status from a Canadian-controlled private corporation (“CCPC”) to a private corporation that was not a CCPC. In doing so, the appellant moved “from one taxing regime with its pluses and minuses to another taxing regime with different pluses and minuses.” (para. 223)

The appellant then sold shares it owned of another corporation, and paid tax on the resultant capital gain at the general corporate tax rate generally applicable to non-CCPC private corporations. The CRA challenged the relevant steps as being abusive under the general anti-avoidance rule (the “GAAR”).

After a detailed and rigorous analysis, the Tax Court ultimately sided with the appellant. The following summarizes the Court’s conclusion:

[211] I agree with the Appellant that by carrying out the … transactions in order to be taxed as a private corporation that is not a CCPC, the Appellant did not abuse any of the provisions at issue.

[212] Parliament has chosen, for policy reasons, to have different sets of rules for different corporations. For example, it has chosen to have different taxing regimes for public corporations, CCPCs, private corporations resident in Canada that are not CCPCs, corporations that are not resident in Canada, and foreign corporations that are resident in Canada. …

[225] The … transactions that resulted in the Appellant ceasing to be a CCPC did not defeat the underlying rationale of the provisions at issue or circumvent the provisions in a manner that frustrated their object, spirit or purpose.

Accordingly, the Tax Court vacated the assessments under appeal, with costs to the appellant.

Prepared by: Katherine Neil

Katherine Neil is an associate practicing in the Vancouver office. Katherine obtained her Juris Doctor degree from the Schulich School of Law at Dalhousie University in 2022. After graduating from law school, she articled at a large, full-service firm based… more »