CRA states that using a foreign corporation with Canadian CMC to produce a lower tax rate on investment income could be GAARable

A corporation which will generate investment income is incorporated outside Canada (and, thus, is not a Canadian corporation, as per s. 89(1) and, therefore, is not a Canadian-controlled private corporation under s. 125(7)), but has its central management and control (CMC) in Canada. As a non-CCPC, it is not subject to the refundable tax under s. 123.3, and is entitled to the s. 123.4(2) deduction. Would s. 245(2) apply?

CRA noted that the foreign incorporation produces a tax benefit consisting of the “avoidance” of the refundable tax under s. 123.3, and the generation of the s. 123.4(2) deduction, and then stated:

… If the purpose of such a transaction were to avoid CCPC status in order to defeat the purpose and intent of various anti-avoidance rules applicable to investment income, including section 123.3 and subsection 123.4(2), the CRA would consider, depending on the circumstances, application of the GAAR … .

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.4 under s. 123.3.