Thought Leaders Practice Taxation

DAC Investment and the GAAR: Did the Tax Court of Canada get it right?

Allan Lanthier is unconvinced by the reasoning in a recent Tax Court of Canada decision involving a Canadian-controlled private corporation and the BVI

Author: Allan Lanthier
Allan Lanthier
Allan Lanthier, a retired partner of an international accounting firm, has been an adviser to both the Department of Finance and the Canada Revenue Agency. 

MONTREAL – Earlier this month, the Tax Court of Canada released its decision in DAC,[1] a case involving a continuance of a Canadian-controlled private corporation from the laws of Canada to the British Virgin Islands, while maintaining common law residence in Canada. The reasons for the continuance were to avoid refundable tax on investment income of a CCPC under section 123.3 of the Act[2] and access the general rate reduction under section 123.4.[3] The court decided that the transaction did not abuse either provision and, as a result, that the general anti-avoidance rule did not apply.

While Ottawa’s new “substantive CCPC” rules[4] mean that this planning technique is largely of historical interest, the decision underscores the uncertainty that can arise as a result of the many different classifications of corporations under the Act, with results that can be inappropriate or anomalous.

After summarizing the rules that were relevant in DAC, this article analyzes the TCC decision, and questions whether the court got it right.

Tax rules for investment income earned by closely-held corporations

Since 1972 tax reform, there have been two foundational — and interlinked — principles that govern the taxation of investment income earned by closely-held corporations.

First, a corporation should not be used as a personal savings account. To prevent this from happening, anti-deferral rules ensure that the corporation is taxed on investment income — including the taxable portion of capital gains — at rates that approximate the highest personal tax rate.

Second, individuals should be indifferent whether investment income is earned personally or by a corporation: indifferent in the sense that the income will be taxed at approximately the same rate in either case. To achieve this integration, the rules in the Act include a refund of refundable tax when taxable dividends are paid, the capital dividend account, and the dividend gross-up and credit.

It sounds simple enough, but our rules have been unnecessarily complex since 1972 tax reform. We have five main categories of corporations — with rules that are at times inconsistent and overlapping — as follows:

  1. Public corporations – generally, corporations resident in Canada whose shares are listed on a designated stock exchange in Canada;
  2. Private corporations – generally, corporations resident in Canada that are not public corporations and are not controlled by one or more public corporations;
  3. Canadian corporations – generally, corporations that are resident and incorporated in Canada;
  4. Taxable Canadian corporations – corporations that are Canadian corporations and are not tax-exempt; and
  5. CCPCs – generally, private corporations that are Canadian corporations, and are not controlled, directly or indirectly, by one or more non-residents, public corporations, or any combination of them.

In 1972, private corporations were generally taxed, on both business and investment income, at a rate that approximated the highest personal rate (a lower rate applied for CCPCs if the small business deduction was available).[5]

A portion of a private corporation’s tax on investment income was credited to its refundable dividend tax on hand account, and the non-taxable portion of capital gains was credited to its capital dividend account. As a result, individuals who used private corporations to earn investment income were denied a deferral when the income was earned and, when the after-tax income was paid to them as dividends, they paid approximately the same amount of tax as if the investment income had been earned directly.

But there were catches.

First, private corporations controlled by non-residents (including by non-resident, publicly-traded companies) could receive a refund of RDTOH, even though the resulting rate reduction accrued to the benefit of non-resident shareholders, rather than Canadian-resident individuals. As described below, this anomaly was fixed in 1981.

Second, even though the integration regime relied primarily on classification as a private corporation, the gross-up and credit only applied to dividends received from taxable Canadian corporations. For example, if a private corporation paid a taxable dividend, it could receive a refund of RDTOH but, unless it was incorporated in Canada (and was therefore a taxable Canadian corporation as well) its shareholders were not entitled to a gross-up and credit.

Unlike the pre-1972 Act, tax reform required that a distinction be made between private and public corporations. However, individuals resident in Canada were entitled to a gross-up and credit for taxable dividends received from both categories of corporations: Parliament settled on the concept of taxable Canadian corporation to accommodate both.[6] One author framed the policy objective behind the concept of Canadian corporation as “an inducement for persons who are going to carry on business operations in Canada to do so through the medium of a corporation incorporated here”.[7]

So, from the outset in 1972, anomalous or inconsistent tax results could occur depending on a corporation’s classification.

The evolution of the rules

These rules began changing in 1981. Under Bill C-139,[8] RDTOH for Part I tax on investment income was restricted to CCPCs, instead of private corporations. As discussed earlier, this change prevented private corporations controlled by non-residents from receiving a refund of RDTOH on the payment of taxable dividends to non-resident shareholders.

In 1995, section 123.3 of the Act introduced a 6.67 per cent refundable tax on a CCPC’s investment income, a rate that was later increased to 10.67 per cent. This new tax kept the corporate tax rate on investment income in the range of the highest personal tax rate. Consistent with the 1981 amendment, the tax applied to CCPCs, but not to other private corporations.

Then, in 2000, corporate tax rate reductions were introduced under section 123.4 of the Act, for “business income not currently eligible for special tax treatment”:[9] as a result, the tax rate reduction — which is now 13 per cent — did not apply to investment income earned by CCPCs.

While 1972 tax reform had relied on the classification of private corporation to prevent tax-deferral on investment income earned by closely-held corporations, the focus was now on CCPCs: as a result of sections 123.3 and 123.4, CCPCs pay additional corporate tax of 23.67 per cent on investment income when compared to other Canadian-resident corporations.

But a private corporation was not a CCPC as defined unless it was incorporated here, a restriction meant to induce taxpayers to incorporate in Canada.[10] Turning that policy objective on its head, DAC continued under the laws of the BVI.

The TCC decision

In DAC, Mr. Civiero, a resident of Ontario, had transferred shares of Soberlink Inc. (Soberlink) to Jacal Holdings Ltd. (Jacal), his wholly-owned CCPC, in December 2013. In October 2014, Soberlink received a non-binding indication of interest from a potential buyer.

On April 14, 2015, Mr. Civiero caused Jacal to transfer the Soberlink shares to DAC under subsection 85(1) of the Act. Since the incorporation of DAC, Mr. Civiero had been its sole director and had held, directly or indirectly, at least 50 per cent of its common shares. The following day, Soberlink’s CEO informed Mr. Civiero that the sale of a division of Soberlink was close to completion and, to effect this sale, the Soberlink shares would be sold to a third party.

On April 29, 2015, DAC was continued from the laws of Ontario to the BVI, and ceased to be a CCPC:[11] it remained a private corporation under the Act, with access to the capital dividend account. On May 14, 2015, DAC sold the Soberlink shares to an arm’s-length party and realized a capital gain of about $2.4 million: it calculated its tax on the taxable capital gain without reference to the additional tax under section 123.3 and applying the rate reduction under section 123.4.

The Minister applied the GAAR, assessing tax under section 123.3 and denying the rate reduction under section 123.4. The parties agreed that the rollover of the Soberlink shares from Jacal to DAC, and DAC’s continuance to the laws of the BVI, were avoidance transactions. The question for the court was whether the transactions resulted in a misuse or abuse, in particular of sections 123.3 and 123.4 of the Act. In a 45-page judgement, Justice D’Arcy concluded they did not.

The reasons for judgement:

The court reviewed the evolution of the rules for taxing investment income of closely-held corporations in some detail, starting with 1972 tax reform. However, its conclusion that Parliament intended that the refundable tax regime for Part I tax — a regime that is at the heart of Canada’s anti-deferral regime for investment income — should only apply to CCPCs, is based on amendments that only started in 1981, as part of Bill C-139.[12]

The court notes that the introduction of additional refundable tax under section 123.3 in 1995 was restricted to CCPCs, and concludes that its object, spirit and purpose is to prevent the deferral of tax by a CCPC, while maintaining the integration of taxes paid by CCPCs.

With respect to the general rate reduction introduced in 2000, the court notes that “the text indicates that Parliament intended” that the reduction be available to all corporations other than income eligible for special preferences, such as investment income earned by CCPCs, and concludes that its object, spirit and purpose is to lower the general corporate tax rate, such that the highest non-refundable tax levied under the Act is 15 per cent.

After noting the many specific tax provisions that only apply to CCPCs,[13] the court states that:

“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.”[14]

The court’s conclusion is that, by entering into avoidance transactions that resulted in taxation under one taxing regime as opposed to another, the taxpayer did not abuse the relevant provisions. Rather:

“The Appellant chose to move from one taxing regime with its pluses and minuses to another taxing regime with different pluses and minuses.”[15]

Critique of the decision

As one of the “minuses”, the court placed considerable emphasis on the fact that there would be no gross-up or credit when Mr. Civiero received dividends from DAC in future: however, DAC could well sprinkle dividends to family members in lower tax brackets, or Mr. Civiero’s estate could access DAC’s after-tax cash at capital gains rates using a post-mortem pipeline. On the other hand, the court did not once refer to the fact that, as a private corporation, DAC had continued access to the capital dividend account, another fundamental part of Canada’s integration regime.

Section 123.3:

With respect to section 123.3, the judgement refers to the 1981 amendment that restricted access to RDTOH to CCPCs, and concludes as follows:

“A consideration of the text, context and purpose of section 123.3 leads to the conclusion that the object, spirit and purpose of the section, its rationale, is to, together with the refundable tax regime and the dividend gross-up and credit scheme, prevent the use of a CCPC to defer taxes that may be payable at a higher rate by the shareholders of the CCPC, while maintaining the integration of taxes paid by CCPCs and their shareholders.”[16]

This author is not convinced. It seems clear that the refundable tax regime was restricted to CCPCs in 1981 to prevent private corporations controlled by non-residents from receiving refunds of RDTOH, not to dilute the rationale of the anti-deferral and integration regimes in the context of closely-held corporations held by Canadian-resident individuals. The court refers several times to a textual, contextual and purposive analysis, but arguably reaches its conclusion based on the bare text of the provision.

Section 123.4:

Nor am I convinced that a continuance to access the rate reduction under section 123.4 is not an abuse. When introducing the provision as part of Budget 2000, Finance Minister Paul Martin stated that its purpose was to lower the rate for high-taxed industries — “putting all sectors of the Canadian economy on an internationally competitive footing”.

Consistent with this purpose, investment income of a CCPC did not qualify for the rate reduction: Part I tax on that income was part of the refundable tax regime. In short, DAC continued to the BVI to access a rate reduction under a provision whose purpose is to allow high-taxed Canadian industries to compete in international markets.

While it is true that investment income of private corporations that are not CCPCs can benefit from section 123.4 based on the text of the provision, in a GAAR analysis “the text of a provision is not determinative of a provision’s rationale”.[17] The question is whether DAC’s continuance to the BVI defeated or frustrated the provision’s object, spirit and purpose. D’Arcy J. concluded it did not. Whether an appeal court would agree remains to be seen.


One of the reasons DAC may have prevailed before the TCC is because the Act has so many regimes for taxing corporations — regimes that can be inconsistent or overlapping — that it can be difficult to determine the underlying rationale of a particular rule.

Former U.S. Treasury Secretary William Simon once said that “The nation should have a tax system that looks like someone designed it on purpose.” The provisions that were in dispute in DAC fall far short of that standard. 


[1] DAC Investment Holdings Inc. v. The King: 2024 TCC 63.

[2] The federal Income Tax Act: RSC 1985, c. 1 (5th Supp.), as amended (referred to in this article as the “Act”).

[3] This tax planning was discussed in “The latest Canadian tax scam has a Caribbean flavour”; Allan Lanthier, January 21, 2022: The Canadian Accountant.

[4] The substantive CCPC rules were included in Bill C-59, the Fall Economic Statement Implementation Act, 2023.

[5] At the time, a lower rate applied on up to $50,000 of annual active business income earned by a CCPC.

[6] The definition of taxable Canadian corporation was also relevant for certain other provisions in the Act, such as the reorganization rules in section 85, section 87 and subsection 88(1). Also, as noted, a private corporation was only entitled to the small business deduction as a CCPC if it was a Canadian corporation.

[7]Categories of Corporations”; Douglas Andison, 1972 Conference Report of the Canadian Tax Foundation.

[8] Bill C-139 was tabled in the House of Commons on December 7, 1982.

[9] 2000 Budget Plan: Department of Finance.

[10] Supra, footnote 7 and accompanying text.

[11] As a result of the continuance, DAC’s taxation year ended on April 28, 2015: subsection 249(3.1) of the Act.

[12] Supra, footnote 8 and accompanying text.

[13] For example, in addition to the small business deduction, a CCPC enjoys: an enhanced SR&ED credit; an employee stock option deferral; an extended balance-due date; a shorter normal reassessment period; and entitlement of its shareholders to allowable business investment losses, and to the lifetime capital gains exemption for shares of a small business corporation. With the possible exception of the normal reassessment period (there was an issue regarding DAC’s statute-barred date), none of these provisions were relevant to DAC before its continuance.

[14] Paragraph 212 of the reasons for judgement.

[15] Paragraph 223 of the reasons for judgement.

[16] Paragraph 139 of the reasons for judgement.

[17] Paragraph 39 of the reasons for judgement.

Allan Lanthier, a retired partner of an international accounting firm, has been an adviser to both the Department of Finance and the Canada Revenue Agency. Title  image: iStock (Lady justice and judge's gavel next to the Canadian flag.) Author photo courtesy Allan Lanthier.

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