Federal Court of Appeal denies benefit in foreign continuance case
Executive summary
On Feb. 20, 2026, the Federal Court of Appeal (FCA) held that the general anti-avoidance rule (GAAR) was properly applied by the minister of national revenue (Minister) in the case of Canada v. DAC Investment Holdings Inc. In overturning the Tax Court of Canada’s (TCC) judgment, the FCA held that the GAAR applied to a Canadian-controlled private corporation (CCPC) that continued to the British Virgin Islands to avoid CCPC status before disposing of corporate shares.
The Federal Court of Appeal case, along with the Tax Court of Canada decision, showcases the complexities to the abuse analysis under the GAAR and highlights the challenges of determining the objective, spirit and purpose (OSP) of tax legislation.
It is important to note that the FCA’s analysis did not consider the introduction of the substantive CCPC rules and changes to the GAAR to include economic substance.
However, this judgment provides valuable insights into the application of GAAR to taxpayers with similar transactions before the effective dates of these amendments.
Background on the case
DAC investment Holdings Inc. (DAC) was considered a CCPC under the Income Tax Act until April 29, 2015. On that date, it was continued as a corporation to the British Virgin Islands and ceased to be a CCPC.
Since the central management and control remained in Canada, DAC was subject to the tax regime for non-CCPCs. Once it achieved its new status, DAC sold shares of another company, Soberlink Inc., and realized a large capital gain.
While the CCPC tax regime often provides preferential tax treatments, investment income earned by the corporation is subject to a refundable tax and does not qualify for a general rate reduction. The Minister assessed the series of transactions and applied the GAAR on the basis that DAC circumvented the tax laws applicable to a CCPC’s investment income by continuing abroad.
During DAC’s appeal, the TCC held in favor of the taxpayer that the GAAR did not apply as the continuance of the corporation to the British Virgin Islands did not abuse the Income Tax Act.
In the Tax Court of Canada’s view, it was Parliament’s intention to allow taxpayers to move from one regime to another—and that the outcome was an understood part of what the court called the “pluses and minuses” of moving between CCPC and non-CCPC status.
The Federal Court of Appeal’s analysis
To determine whether the GAAR applies, it must meet three criteria: there must be a tax benefit, the transaction that gave rise to the benefit must be an avoidance transaction and that transaction must be abusive.
The only issue at appeal to the FCA was whether the TCC erred in its conclusion that the transactions were not abusive.
The abuse analysis required understanding the OSP of the provisions relied upon in obtaining the tax benefit—and determining whether the avoidance transaction defeated or frustrated the OSP.
The FCA found that the TCC erred in its conclusion as the Tax Court of Canada did not correctly state the OSP for the following relevant provisions.
The Income Tax Act normally levies a refundable tax on CCPC’s passive income. This tax is later refunded to the corporation when a dividend is paid to its shareholders.
The FCA found the TCC’s statement on the OSP of this provision was too broad as it described the overall tax regime for investment income in the Income Tax Act.
In the FCA’s view, the OSP of this provision was to reduce tax deferral opportunities that individuals earning investment income directly might otherwise obtain by earning such income through a CCPC.
The Income Tax Act allows the reduction of a corporation’s general tax rate by 13 per cent in certain circumstances. The FCA concluded that the TCC did not describe the rationale behind this provision.
In the FCA’s view, the OSP of this section is to promote international competitiveness of business in Canada. The rationale for excluding investment income from the general rate reduction is that investment income earned by a CCPC already has a preferential tax rate because a portion of the tax is refunded when a dividend is paid to its shareholders.
The FCA also found the exclusion ensures investment income is taxed the same whether received individually or through a corporation.
Corporate continuance provisions apply when a Canadian-incorporated corporation continues to a different jurisdiction—or the inverse occurs. Upon continuation, the Income Tax Act deems the corporation to have been incorporated in the new jurisdiction.
While the FCA agreed with the TCC’s view that the provision was intended to be a part of the coherent tax regime for the corporate continuances, it found that the TCC did not correctly describe the results that were intended for this provision.
In the FCA’s view, the OSP is to make tax provisions in the Income Tax Act fairer for corporations moving into or leaving Canada by way of a continuance.
Once the OSP was established for the aforementioned provisions, the FCA then analyzed whether the avoidance transaction defeated or frustrated the OSPs.
The FCA found the TCC erred in understanding Parliament’s intention regarding the corporate continuance provision as it was not intended to be used to circumvent the other provisions.
The TCC originally found that Parliament intended to allow a CCPC to take steps to become a non-CCPC should it choose, and moving from one taxing regime to another is just a consideration of its “pluses and minuses.”
Contradictorily, the FCA found the TCC’s analysis of the “pluses and minuses” under both tax regimes was not relevant to the abuse analysis.
The FCA held that the OSP of the corporate continuance provision was frustrated because the continuance to the British Virgin Islands was to obtain a tax benefit and not for business purposes. Even after the continuance, DAC remained a resident of Canada as the central management and control was in the country.
The FCA found that the refundable tax and general rate reduction provisions were abused as well because the continuance to the British Virgin Islands prevented these anti-deferral provisions from applying.
As a result, the FCA overturned the TCC decision and concluded that the GAAR applied and denied the tax benefit that arose from this type of planning.
Looking ahead
With the same case facts and tax provisions, the FCA and the TCC came to different conclusions of the OSP for the provisions, which affected their respective conclusions on whether the Income Tax Act was abused.
It is anticipated that the taxpayer will seek leave to appeal this decision to the Supreme Court of Canada (SCC). If accepted, it will be interesting to see how the SCC articulates the meaning of these provisions.