Section 123.3

Table of Contents

See Also

Gladwin Realty Corporation v. The Queen, 2019 TCC 62

no CRA challenge to continuance to BVI to avoid s. 123.3 tax

Hogan J found that transactions in which the taxpayer recognized two capital gains in connection with the sale of a property to a third party and then offset the second capital loss under s. 40(3.12) produced a resulting double-increase to its capital dividend account that was abusive for s. 245(4) purposes.

Before recognizing either of the two capital gains, the taxpayer was continued to the BVI in order to cease to be a Canadian-controlled private corporation and to not be subject to additional refundable taxes under s. 123.3. CRA did not challenge this planning.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) using the CDA and negative ACB rules to generate “over-integration” was abusive 554
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) contrary to purpose of the capital dividend rules to fully exempt a capital gains distribution 294
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1) purpose of s. 40(3.1) is to trigger gain on extraction of excess funds by passive partners 324

Articles

Anthony Strawson, Timothy P. Kirby, "Vendor Planning for Private Corporations: Select Issues", 2017 Conference Report, (Canadian Tax Foundation), 11:1-28

Continuance of a CCPC to a foreign jurisdiction may create better protection for assets (p. 11:16)

[A] corporation that is incorporated outside Canada or that is continued to a jurisdiction outside Canada cannot be a “Canadian corporation” or a CCPC at the relevant time. However, if a corporation that is not a Canadian corporation and that also is not resident in Canada earns investment income, the income generally is treated as foreign accrual property income…

[M]any foreign jurisdictions have more robust asset protection laws than Canada, which can be an important reason for establishing a corporation in a foreign jurisdiction.

Additional tax on aggregate investment income for CCPCs (p. 11:17)

[A]ggregate investment income consists of all taxable capital gains realized by the CCPC, plus the CCPC’s passive income (rents, interest, royalties, and dividends from portfolio investments in foreign corporations), other than dividends paid by taxable Canadian corporations. The two provisions that implement the anti-deferral regime are section 123.3, which provides for an additional 10 3/3 percent tax on aggregate investment income, and the “full rate taxable income” definition in subsection 123.4(1), which denies the general rate reduction in subsection 123.4(2) in respect of aggregate investment income of a CCPC. Section 123.3 provides that the tax is applicable to a corporation that is a CCPC throughout the relevant year, while the exclusion of aggregate investment income in the definition of “full rate taxable income” in subsection 123.4(1) is also applicable only to corporations that are CCPCs throughout the relevant year.

GAAR considerations re avoidance of CCPC status so as to reduce taxability of aggregate investment income (pp. 11:18-19)

First, CCPCs alone are entitled to numerous favourable rules under the Act. Nevertheless, it does not seem particularly controversial to structure legal and de facto control of a corporation as a CCPC in order to benefit from the favourable rules; indeed, such planning is both longstanding and very common. It is not obvious why the converse should not also be true; that is, it is not obvious why taxpayers should not be entitled to organize their affairs to cause a corporation not to qualify as a CCPC, thereby avoiding both the favourable and unfavourable rules that apply to CCPCs.

Second, and very much related to the first point, the Act is designed to readily strip a corporation of its CCPC status. Since CCPC status may be lost in a myriad of circumstances as a result of entirely non-tax-motivated transactions, the implication is that CCPC status is not the default treatment but rather an aberration.

Third…the Department of Finance turned its mind to extending the refundable tax regime to non-CCPC private corporations in July 2017. To date, there has been no suggestion that the department intends to move forward with such a change… .