Supreme Court of Canada Grants Leave for Appeal in Deans Knight

The Supreme Court of Canada (the “SCC”) has granted the application for leave to appeal in Canada v. Deans Knight Income Corporation, 2021 FCA 160 (“Deans Knight”).

Deans Knight deals with the application of the general anti-avoidance rule (“GAAR”) to subsection 111(5) of the federal Income Tax Act. The Federal Court of Appeal (the “FCA”) held that the object, spirit and purpose of subsection 111(5) was to “restrict the use of specified losses, including non-capital losses, if a person or group of persons has acquired actual control over the corporation’s actions, whether by way of de jure control or otherwise” (at paragraph 72) and that the transactions entered into by the taxpayer abused this object, spirit and purpose. This decision introduced the novel concept of “actual control” without significant discussion of its scope or content, which has created uncertainty within the tax community. For our earlier analysis of the FCA’s decision, see here.

In seeking leave, the taxpayer questioned whether the GAAR permits a departure from the de jure control test articulated by the SCC in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795 (SCC). The SCC’s grant of leave suggests that the “actual control” test articulated by the FCA may be discarded or, at minimum, that more clarity will be provided regarding that test and the role of de jure control in analyzing the object, spirit and purpose of subsection 111(5).