DAC – Tax Court of Canada finds no abuse in avoiding CCPC status by continuing to BVI

With a view to its imminent disposition of the shares of a subsidiary, the taxpayer continued to the British Virgin Islands, with the result that it ceased to be a Canadian-controlled private corporation (CCPC) and became a private corporation that was not a CCPC (its central management and control remained in Canada). CRA assessed on the basis that the resulting non-application of s. 123.3 (imposing refundable tax) and s. 123.4 (denying the general rate reduction on aggregate investment income) was an abuse of those provisions and of s. 250(5.1).

In finding no abuse of s. 123.3, D’Arcy stated:

Parliament has chosen, for policy reasons, to have different sets of rules for different corporations. …

Prior to being continued in the British Virgin Islands, the Appellant was on one side of the dividing line [a CCPC] and, after it was continued, it was on the other side of the dividing line [a non-CCPC]. …

[T]he Appellant’s choice to be taxed as a non-CCPC did not abuse section 123.3 since Parliament only intended it to apply to a corporation’s investment income that is taxed under the regime for CCPCs.

After indicating that the absence of a rate reduction under s. 123.4 for aggregate investment income reflected that it was subject to a low rate of tax once distributed as dividends, D’Arcy J noted that there was no abuse regarding the s. 123.4 rate reduction, since the rate reduction it enjoyed for its taxable capital gain reflected the unavailability of a dividend refund.

Finally, the application of s. 250(5.1) accorded with its rationale, which was “to equate the place of continuance of a corporation with its place of incorporation”.

Neal Armstrong. Summaries of DAC Investment Holdings Inc. v. The King, 2024 TCC 63 under s. 245(4), s. 123.3, s. 123.4(1) – full rate taxable income – (b)(iii) and s. 250(5.1).