DAC Investment Holdings Inc. v. The King

DAC Investment Holdings Inc. v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-05-09
Neutral citation
2024 TCC 63
File numbers
2021-1079(IT)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Income Tax Act
Decision Content
Docket: 2021-1079(IT)G
BETWEEN:
DAC INVESTMENT HOLDINGS INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on May 23, 2023, at Toronto, Ontario
Before: The Honourable Justice Steven K. D’Arcy
Appearances:
Counsel for the Appellant:
Matthew G. Williams
Florence Sauve
Brittany D. Rossler
Counsel for the Respondent:
Arnold H. Bornstein
Christopher M. Bartlett
JUDGMENT
In accordance with these Reasons for Judgment:
The appeal with respect to the reassessment made under the Income Tax Act for the Appellant’s taxation year ending April 30, 2016 is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant’s transactions, as set out in the attached Reasons for Judgment, did not result in abusive tax avoidance for the purposes of section 245 of the Income Tax Act.
Signed at Halifax, Nova Scotia, this 9th day of May 2024.
“S. D’Arcy”
D’Arcy J.
Citation: 2024TCC63
Date: 20240509
Docket: 2021-1079(IT)G
BETWEEN:
DAC INVESTMENT HOLDINGS INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
Introduction
[1] Prior to April 29, 2015, the Appellant was taxed on its worldwide income under the taxing regime for a Canadian-controlled private corporation (“CCPC”). On April 29, 2015, it continued in a foreign jurisdiction such that it was deemed to be incorporated outside of Canada; however, it remained a resident of Canada, taxed on its worldwide income. Since the Appellant was not considered to be incorporated in Canada, it was no longer taxed on its worldwide income under the taxing regime for CCPCs, but rather was taxed under the regime for private corporations that were not CCPCs and that were not Canadian corporations. As a result, a host of provisions in the Act ceased to apply to the Appellant, provisions that were not previously applied began to apply to the Appellant, and other provisions applied to the Appellant in a different manner.
[2] One provision that ceased to apply was section 123.3 of the Income Tax Act[1] (the “Act”), which levies the 10 2/3% refundable tax on a CCPC’s investment income.
[3] Another provision that ceased to apply was paragraph (b) of the definition of full rate taxable income in subsection 123.4(1). This meant that the Appellant’s entitlement to the 13% general rate reduction provided for in subsection 123.4(2) was now determined under paragraph (a) of the definition of full rate taxable income. As a result, the Appellant was now entitled to claim the 13% general rate reduction in respect of its investment income.
[4] The Minister applied the general anti-avoidance rule (the “GAAR”) and assessed the Appellant on the basis that its investment income was subject to the section 123.3 refundable tax and that it was not entitled to claim the section 123.4 general rate reduction in respect of its investment income.
[5] The Appellant challenges the application of the GAAR.
[6] The parties filed an Agreed Statement of Facts and a Supplemental Agreed Statement of Facts[2] (jointly referred to as the “agreed statement of facts”). There were no witnesses called at the hearing. The parties attached a number of exhibits to the agreed statement of facts. The agreed statement of facts (without the appendices) is attached as “Appendix A” to these Reasons for Judgment.
Relevant Facts
[7] The Appellant was incorporated under the Business Corporations Act (Ontario)[3] on September 11, 2001.
[8] Since the inception of the Appellant, Mr. David Civiero has been its sole director and has held directly or indirectly at least 50% of its common shares. From 2015 through 2019, Mr. Civiero was the sole common shareholder of the Appellant. At all material times, Mr. Civiero resided in Ontario.
[9] On or around October 22, 2011, Mr. Civiero acquired common shares of Soberlink Inc. He purchased additional shares of Soberlink Inc. on, or around, June 26, 2013. On or around December 31, 2013, Mr. Civiero transferred all of his common shares of Soberlink (the “Soberlink Shares”) to Jacal Holdings Ltd. (“Jacal”). Since December 11, 1996, Mr. Civiero has been the sole director and has held all of the shares of Jacal.
[10] The following occurred after Mr. Civiero transferred the Soberlink Shares to Jacal:
-On October 3, 2014, Soberlink Inc. received a non-binding indication of interest from a potential buyer;
-On April 14, 2015, the Appellant acquired the Soberlink Shares from Jacal pursuant to a section 85 “rollover” transaction. On this date, the Appellant’s only assets were the Soberlink Shares;
-On April 15, 2015, Soberlink’s CEO informed Mr. Civiero that the sale of a division of Soberlink was close to completion. In order to effect this sale, the Soberlink Shares would be sold to a third party;
-On April 29, 2015, the Appellant was continued into the British Virgin Islands. As a result of the continuance, the Appellant’s 2015 taxation year ended on April 28, 2015;
-At all relevant times following the Appellant’s continuance, the Appellant’s central management and control remained in Ontario, Canada;
-On May 14, 2015, the Appellant sold the Soberlink Shares to an arm’s-length party and realized a capital gain in the amount of $2,359,295;
-The Appellant reported a taxable capital gain of $1,179,648 on its tax return for its taxation year ending on April 30, 2016 (the “2016 taxation year”). The Appellant reported no other income on its tax return other than a foreign exchange gain; and
-The Appellant filed this tax return on the basis that, during the 2016 taxation year, the Appellant:
was a corporation resident in Canada, subject to tax on its worldwide income under the Act;
was a “private corporation” as that term is defined in subsection 89(1) of the Act; and
was not a CCPC under the Act.
[11] The Minister applied the GAAR when reassessing the Appellant’s 2016 taxation year. Specifically, the Minister, when reassessing the Appellant:
-assessed refundable tax of $91,003 under section 123.3 of the Act on the basis that the Appellant was a CCPC; and
-denied the general reduction of $148,216 claimed by the Appellant under section 123.4 of the Act.
The Law
[12] The leading cases on the how the GAAR is to be applied are the Supreme Court of Canada (the “SCC”) decisions in Canada Trustco Mortgage Co. v. Canada[4] (“Canada Trustco”), Lipson v. Canada[5] (“Lipson”), Copthorne Holdings Ltd. v. Canada[6] (“Copthorne”), Canada v. Alta Energy Luxembourg S.A.R.L.[7] (“Alta Energy”) and Deans Knight Income Corp. v. Canada[8] (“Deans Knight”).[9]
[13] In Copthorne and Deans Knight, the SCC set out how the provisions of section 245 that impose the GAAR are to be applied to a transaction or a series of transactions. The Court’s reasoning in Copthorne and Deans Knight is consistent with its reasoning in its decisions in Canada Trustco, Lipson, and Alta Energy.
[14] In its decisions, the SCC has made a number of observations with respect to the application of the GAAR, including the following:
-The GAAR is different from the other provisions of the Act. While the Act is dominated by “explicit provisions dictating specific consequences” that invite a largely textual interpretation, the GAAR is “quite a different sort of provision”. It is a “broadly drafted provision, intended to negate arrangements that would be permissible under a literal interpretation of other provisions of the Income Tax Act, on the basis that they amount to abusive tax avoidance.”[10]
-The GAAR was enacted “as a provision of last resort”.[11]
-The SCC has affirmed on numerous occasions the Duke of Westminster principle that taxpayers can order their affairs to minimize the amount of tax payable.[12] However, this principle “has never been absolute”[13]. Where a transaction or series of transactions is shown to be abusive, the Duke of Westminster principle is “‘attenuated’ by the GAAR”.[14]
-A general rule such as the GAAR introduces a degree of uncertainty in tax planning. A proper application of the GAAR methodology limits the amount of uncertainty.[15] Further, this uncertainty“underlines the obligation of the Minister who wishes to overcome the countervailing obligations of consistency and predictability to demonstrate clearly the abuse he alleges.”[16]
[15] The SCC has set out three steps to be followed in determining the applicability of the GAAR. Those steps consist in ascertaining:
whether there is a “tax benefit” arising from a “transaction” under subsections 245(1) and (2);
whether the transaction is an avoidance transaction under subsection 245(3), in the sense of not being “arranged primarily for bona fide purposes other than to obtain the tax benefit”; and
whether the avoidance transaction is abusive under subsection 245(4).[17]
[16] If there is more than one tax benefit, the court conducts a GAAR analysis for each tax benefit.[18]
[17] All three requirements must be fulfilled. The burden is on the taxpayer to refute (1) and (2) and on the Minister to establish (3).[19]
[18] The SCC has recognized that the line between legitimate tax minimization and abusive tax avoidance is far from bright.[20] If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer.[21]
Was there a tax benefit?
[19] During the relevant period, the definition of tax benefit in subsection 245(1) read as follows:
“tax benefit” means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty.
[20] Whether a tax benefit exists is a question of fact.[22] When determining whether a tax benefit exists, the magnitude of the tax benefit is irrelevant.[23] The determination may require a comparison of the taxpayer’s situation with an alternative arrangement.[24]
[21] When assessing the Appellant, the Minister assumed that the Appellant had received a tax benefit as a result of section 123.3 not being applicable and section 123.4 being applicable in the Appellant’s 2016 taxation year. The Appellant, in paragraph 28 of the agreed statement of facts, concedes these two tax benefits. The Respondent did not argue that the Appellant received any other tax benefits.
[22] The position of the Appellant and the Respondent is consistent with the facts before me. Therefore, I accept the parties’ position that the only tax benefits realized by the Appellant from the transactions at issue arose as a result of section 123.3 not being applicable and section 123.4 being applicable in the Appellant’s 2016 taxation year. Paragraph 29 of the agreed statement of facts states that the quantum of the tax benefits realized by the Appellant is computed in accordance with the chart at Appendix “B” of the agreed statement of facts. This chart is attached as “Appendix B” to these Reasons for Judgment.
Were the transactions at issue avoidance transactions?
[23] Avoidance transaction is defined in subsection 245(3) to mean any transaction:
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
[24] The definition removes from the application of the GAAR transactions or series of transactions that may reasonably be considered to have been undertaken or arranged primarily for a non-tax purpose.[25] As noted in Copthorne, “[a]n avoidance transaction may operate alone to produce a tax benefit, or may operate as part of a series of transactions which produces a tax benefit”.[26]
[25] Similar to the determination of whether a tax benefit exists, the determination of whether a transaction (or a series of transactions) is an avoidance transaction is a question of fact.[27]
[26] If a transaction has both tax and non-tax purposes, then the GAAR will not apply to the transaction if the non-tax purpose was primary.[28]
[27] The SCC explained in Copthorne how one applies subsection 245(3) to a series a transactions, as follows:
Where, as here, the Minister assumes that the tax benefit resulted from a series of transactions rather than a single transaction, it is necessary to determine if there was a series, which transactions make up the series, and whether the tax benefit resulted from the series. If there is a series that results, directly or indirectly, in a tax benefit, it will be caught by s. 245(3) unless each transaction within the series could “reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain [a] tax benefit”. If any transaction within the series is not undertaken primarily for a bona fide non-tax purpose that transaction will be an avoidance transaction.[29]
[28] When applying the GAAR, the Minister treated the rollover of the Soberlink Shares from Jacal to the Appellant and the continuance of the Appellant into the British Virgin Islands on April 29, 2015 as avoidance transactions. The Appellant concedes at paragraph 30 of the agreed statement of facts that the two transactions were avoidance transactions.
[29] On the basis of the facts before me, I accept that the two transactions are the only avoidance transactions.
[30] As the SCC noted in Alta Energy, citing Canada Trustco and Lipson, tax avoidance is not tax evasion. Further, “... tax avoidance should not be conflated with abuse. Even if a transaction was designed for a tax avoidance purpose and not for a bona fide non-tax purpose, such as an economic or commercial purpose, it does not mean that it is necessarily abusive within the meaning of the GAAR”.[30]
[31] The GAAR will only apply if the avoidance transaction is found to be abusive. As stated by the SCC, “… [a] finding that a bona fide non-tax purpose is lacking, taken alone, should not be considered conclusive evidence of abusive tax avoidance.”[31]
Are the avoidance transactions abusive under subsection 245(4)?
[32] Subsection 245(4) reads as follows:
Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction
(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of
(i) this Act,
(ii) the Income Tax Regulations,
(iii) the Income Tax Application Rules,
(iv) a tax treaty, or
(v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or
(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.
[Emphasis added.]
[33] Although subsection 245(4) refers to determinations of “misuse” and “abuse”, the SCC has made it clear that there is no distinction between an “abuse” and a “misuse”. The SCC has stated the following: “Section 245(4) requires a single, unified approach to the textual, contextual and purposive interpretation of the specific provisions of the Income Tax Act that are relied upon by the taxpayer in order to determine whether there was abusive tax avoidance.”[32] As a result, I will only use the term “abuse”.
[34] The determination of whether a transaction is an abuse of the Act involves the following two steps:
I must first determine the “object, spirit or purpose of the provisions of the Income Tax Act that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids.”
Once this step is completed, I will “examine the factual context of [the] case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue.”[33]
Determining the object, spirit or purpose of the relevant provisions
[35] One uses a unified textual, contextual and purposive approach to identify the object, spirit or purpose of the relevant provisions. It is the same interpretive approach as that employed by the courts in all matters of statutory interpretation. However, as the SCC noted in Copthorne, the analysis seeks a different result:
... In a traditional statutory interpretation approach the court applies the textual, contextual and purposive analysis to determine what the words of the statute mean. In a GAAR analysis the textual, contextual and purposive analysis is employed to determine the object, spirit or purpose of a provision. Here the meaning of the words of the statute may be clear enough. The search is for the rationale that underlies the words that may not be captured by the bare meaning of the words themselves. However, determining the rationale of the relevant provisions of the Act should not be conflated with a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do.[34]
[Emphasis added.]
[36] The SCC confirmed this approach in Deans Knight, emphasizing the rationale of the provision.[35] It noted the following:
… The object, spirit and purpose analysis has a precise function: to discern the underlying rationale of the provisions. A consideration of the text, context and purpose gives structure to this analysis. Indeed, the object, spirit and purpose analysis should not turn into a “value judgment of what is right or wrong... what tax law ought to be or ought to do” (Copthorne, at para. 70). Nor should it become a “search for an overriding policy of the Act” that is not founded in the text, context and purpose of the provisions (Canada Trustco, at para. 41; Alta Energy, at para. 49). Rather, a focus on the provision’s text, context and purpose ensures that the intrinsic and extrinsic evidence used to discern a provision’s rationale remains tied to the provision itself. …[36]
[37] When determining the object, spirit and purpose of a provision, the court refers to the provision itself, the scheme of the Act and permissible extrinsic aids.[37]
[38] As was noted in Copthorne and Deans Knight, compliance with the text of the relevant provisions is not the issue before the Court. The Minister would not have to rely on the GAAR if the tax benefit of the transaction or series of transactions was prohibited by the text of the relevant provisions.[38]
[39] Deans Knight refers to the wording of a provision as the means to give effect to the rationale behind a provision. The words are “primarily a means of giving effect to Parliament’s aim, rather than a complete encapsulation of the aim itself.”[39] The SCC noted that “the means do not necessarily provide a full answer as to why the provision was adopted”.[40] As my colleague, Justin Owen, noted in Husky Energy Inc. v. The King,[41] the SCC is emphasizing, “[t]hat the means by which a provision achieves a particular objective will not always fully capture why Parliament enacted the provision.” In short, as the SCC noted in its previous decisions on the GAAR, the text of a provision is not determinative of a provision’s rationale.
[40] The object, spirit and purpose of the provisions in question should be articulated as a concise description of the provisions’ rationale:
The object, spirit and purpose of a provision must be worded as a description of its rationale (Copthorne, at para. 69). When articulating the object, spirit and purpose of a provision, a court is not repeating the test for the provision, nor is it crafting a new, secondary test that will apply to avoidance transactions. Discerning the object, spirit and purpose does not rewrite the provision; rather, the court merely takes a step back to formulate a concise description of the rationale underlying the provision, against which a textually compliant transaction must be scrutinized (Trustco, at para. 57; Copthorne, at para. 69).[42]
[Emphasis added.]
The abuse alleged by the Minister
[41] The Respondent argues, at paragraph 19 of his written submissions, that the Appellant abused the following five provisions of the Act:
-Subsection 250(5.1), which applies when a corporation is continued in a jurisdiction;
-The definition of a CCPC in subsection 125(7);
-The definition of a Canadian corporation in subsection 89(1);
-Section 123.3, which levies a refundable tax on certain investment income of a CCPC; and
-The portion of the definition of full rate taxable income included in subparagraph 123.4(1)(b)(iii). The definition of full rate taxable income is used to determine the amount of the taxable income of a corporation that is eligible for the 13% rate reduction provided for in subsection 123.4(2).
[42] I will now turn to the object, spirit and purpose of each of these provisions.
[43] I will begin by considering the text of each of these provisions. While, as just discussed, the text is not determinative of the object, spirit or purpose of a provision, it is relevant. The text helps the Court determine what the provision was intended to do.[43] When determining the object, spirit and purpose, considering what the text of the provision expressly permits or restricts may be relevant in determining what the provision was intended to do. In addition, the text can help to “identify the nature (or ‘type’) of provision at issue, which can be relevant to understanding the rationale underlying it.”[44]
[44] After considering the text of a provision or provisions, I will consider the context and purpose of the provision or provisions at issue. At paragraph 91, Copthorne provides the following guidance on the contextual analysis:
The consideration of context involves an examination of other sections of the Act, as well as permissible extrinsic aids (Trustco, at para. 55). However, not every other section of the Act will be relevant in understanding the context of the provision at issue. Rather, relevant provisions are related “because they are grouped together” or because they “work together to give effect to a plausible and coherent plan” (R. Sullivan, Sullivan on the Construction of Statutes (5th ed. 2008), at pp. 361 and 364).
[45] As noted in Deans Knight, the focus is on the relationship between the provision alleged to have been abused and the particular scheme within which it operates. The context can serve to identify the function of the provision within a coherent scheme.[45]
[46] With respect to purpose, Deans Knight notes that understanding the provision’s purpose is central to the GAAR analysis. The provision’s purpose can help to discern the outcomes that Parliament sought to achieve or prevent.[46] The SCC explains the purposive analysis at paragraph 68 as follows:
… A purposive analysis permits courts to consider legislative history and extrinsic evidence (see R. Sullivan, The Construction of Statutes (7th ed. 2022), at § 9.03, at paras. 7-8). These materials provide insight into the rationale for specific provisions. Of course, tax provisions can serve a variety of independent and interlocking purposes (Trustco, at para. 53). Nevertheless, such provisions are intended to promote particular aims, and courts must therefore determine what outcome Parliament sought to achieve through the specific provision or provisions (Copthorne, at para. 113).
[47] Similar to how one can understand the purpose of the section at issue in Deans Knight, one can only understand the purpose of the sections at issue in this appeal by considering the function that they play in the larger scheme of computing the tax payable by corporations—in particular, how the Act taxes private corporations that are CCPCs and private corporations that are not CCPCs.
[48] I will first consider the two definitions at issue: the definition of a CCPC and the definition of a Canadian corporation. I will then consider each of the three other sections that are at issue in this appeal.
Object, spirit and purpose of the definitions of CCPC and Canadian corporation
[49] In addition to addressing the definitions of a CCPC and a Canadian corporation, I will also discuss the definition of a private corporation, since a corporation must be a private corporation before it can be a CCPC. Further, the taxation of private corporations that are not CCPCs is relevant when determining the object, spirt and purpose of the definitions of CCPC and Canadian corporation.
[50] Subsection 248(1) states that, for the purposes of the Act, CCPC has the meaning assigned by subsection 125(7). Subsection 125(7) defines CCPC as follows:
In this section …
“Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than
(a) a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph (c), or by any combination of them,
(b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (c) were owned by a particular person, be controlled by the particular person,
(c) a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange, or
(d) in applying subsection (1), paragraphs 87(2)(vv) and (ww) (including, for greater certainty, in applying those paragraphs as provided under paragraph 88(1)(e.2)), the definitions “excessive eligible dividend designation”, “general rate income pool” and “low rate income pool” in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a corporation that has made an election under subsection 89(11) and that has not revoked the election under subsection 89(12);
[51] The definition states that CCPC means the words that follow. As a result, the definition is exhaustive.
[52] The definition provides that in order for a corporation to be a CCPC, it must be both a private corporation and a Canadian corporation.
[53] Private corporation is defined, for purposes of the Act, in subsection 248(1) by reference to the meaning assigned by subsection 89(1). Subsection 89(1) defines private corporation as follows:
“private corporation” at any particular time means a corporation that, at the particular time, is resident in Canada, is not a public corporation and is not controlled by one or more public corporations (other than prescribed venture capital corporations) or prescribed federal Crown corporations or by any combination thereof and, for greater certainty, for the purposes of determining at any particular time when a corporation last became a private corporation,
(a) a corporation that was a private corporation at the commencement of its 1972 taxation year and thereafter without interruption until the particular time shall be deemed to have last become a private corporation at the end of its 1971 taxation year, and
(b) a corporation incorporated after 1971 that was a private corporation at the time of its incorporation and thereafter without interruption until the particular time shall be deemed to have last become a private corporation immediately before the time of its incorporation;
[54] This definition applies at a point in time. It provides that in order for a corporation to be a private corporation at a particular point in time it must, at that particular point it time, be resident in Canada, not be a public corporation and not be controlled by one or more public corporations[47] or prescribed federal Crown corporations or by any combination of these corporations.
[55] As will be discussed, the term private corporation is used throughout the Act when determining the taxation of corporations that are not public corporations. While the definition of a CCPC is one example of where the term is used, other examples include the provisions dealing with refundable Part IV tax[48] and the provisions dealing with capital dividends.[49]
[56] A public corporation is defined, for the purposes of the Act, in subsection 248(1) and subsection 89(1). Generally speaking, it is a corporation that is resident in Canada and that has a class of shares listed on a designated stock exchange.
[57] Subsection 248(1) states that, for the purposes of the Act, Canadian corporation has the meaning assigned by subsection 89(1). Subsection 89(1) defines Canadian corporation as follows:
“Canadian corporation” at any time means a corporation that is resident in Canada at that time and was
(a) incorporated in Canada, or
(b) resident in Canada throughout the period that began on June 18, 1971 and that ends at that time,
and for greater certainty, a corporation formed at any particular time by the amalgamation or merger of, or by a plan of arrangement or other corporate reorganization in respect of, 2 or more corporations (otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of the property by the other corporation or as a result of the distribution of the property to the other corporation on the winding-up of the corporation) is a Canadian corporation because of paragraph (a) only if
(c) that reorganization took place under the laws of Canada or a province, and
(d) each of those corporations was, immediately before the particular time, a Canadian corporation;
[58] Under this definition, a corporation will be a Canadian corporation at any time if, at the particular time, it is a resident of Canada and was incorporated in Canada.[50]
[59] Because of the definitions of private corporation and Canadian corporation, in order for a corporation to be a CCPC at a particular point in time, the corporation must be resident in Canada and incorporated in Canada. Also, it must not be a public corporation or controlled by one or more public corporations, or prescribed federal Crown corporations or by any combination of these corporations.
[60] Even if the corporation is a private corporation and a Canadian corporation, it will not be a CCPC if it is included in paragraphs (a) to (d) of the definition of CCPC. Paragraphs (a) to (c) exclude corporations controlled directly or indirectly in any manner by one or more non-resident persons, corporations controlled by one or more public corporations, corporations with a class of shares listed on a designated stock exchange, or any combinations of them. Paragraph (d) of the definition provides that a corporation that has made an election under subsection 89(11) is deemed to not be a CCPC for the purpose of the small business deduction rate and the eligible dividend scheme.
[61] The definitions of CCPC, private corporation and Canadian corporation were first added to the Act in 1971 as part of the 1971 tax reform legislation.
[62] At the time of their introduction, the government emphasized the importance of recognizing whether a corporation was described in the Act as a private corporation or a CCPC. The Department of National Revenue’s 1971 guide on corporate taxation noted the following:
… The importance of the income tax implications where a corporation is a private corporation, or a particular type of private corporation such as a Canadian‑controlled private corporation, cannot be over-emphasized. The reader is therefore asked to pay particular attention to the exact term used when a corporation is described in the Act …[51]
[63] As will be discussed, the importance of the definitions of private corporation and CCPC in determining the taxation of a corporation under the Act continues under the current scheme of the Act.
[64] The definition of CCPC at the time that it was added to the Act in 1971 read as follows:
(a) “Canadian-controlled private corporation” means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations or by any combination thereof;[52]
[65] Parliament has amended the definition on numerous occasions, as follows:
-It was amended in 1980 to provide that a corporation did not lose its status as a CCPC if it was controlled by a public corporation that was a prescribed venture capital corporation;[53]
-It was amended in 1998 to add text similar to current paragraphs (b) and (c) of the definition;[54]
-Minor amendments were made to the definition of CCPC in 2001.[55] This included adjustments to the wording of the provision and the addition of the reference to paragraph (c) in paragraph (a) that is found in the current version; and
-The definition was amended twice in 2007. The first of these amendments added paragraph (d) for the purposes of the subsection 89(11) election discussed above.[56] The second of these amendments substituted the term “designated stock exchange” for “prescribed stock exchange.”[57]
[66] The definition of Canadian corporation at the time that it was added to the Act in 1971 read as follows:
(a) “Canadian corporation” at any time means a corporation that was resident in Canada at that time and was
(i) incorporated in Canada, or
(ii) resident in Canada throughout the period commencing June 18, 1971 and ending at that time,
except that for the purposes of subsection 83(1) a corporation that was incorporated in Canada before April 27, 1965 and that was not resident in Canada at the end of 1971 shall be deemed not to be a Canadian corporation;
[67] The definition was amended in 1977 to remove the text after subparagraph 89(1)(a)(ii) above.[58] The definition was then amended in 1994 to the current version by including the text referring to amalgamations after paragraph (b).[59]
[68] The text of the definition of Canadian corporation creates a class of corporations that meets the conditions of the definition. The definition is intended to differentiate between corporations that are resident in Canada and corporations that are not resident in Canada, as well as between corporations incorporated in Canada and outside of Canada.
[69] Pursuant to the definition of a CCPC, a private corporation cannot be a CCPC unless it is a Canadian corporation. As a result, to be a CCPC at a particular point in time, a private corporation must either be incorporated in Canada or have been resident in Canada continuously since June 18, 1971.
[70] The text of the definition of CCPC is intended to narrow down the pool of private corporations that qualify as CCPCs to include only those that are Canadian corporations and that are not described in paragraphs (a) to (d) of the definition of a CCPC.
[71] As will be discussed, the effect of a corporation being defined as a public corporation, a private corporation or a private corporation that is a CCPC is key to determining the object, spirit and purpose of the provisions at issue in these appeals. This will be evident once the function that each of the definitions plays in the scheme of the Act is considered.
[72] Numerous provisions of the Act distinguish between a public corporation, a CCPC and a private corporation. As well, certain provisions only apply if a corporation is a Canadian corporation. This results in different taxing regimes for public corporations, CCPCs, and private corporations that are not CCPCs.
[73] All corporations that are resident in Canada are taxed on their worldwide income. However, for policy reasons the Act draws important distinctions between public corporations and private corporations and between private corporations that are CCPCs and private corporations that are not CCPCs.
[74] Generally speaking, private corporations are entitled to a number of advantages that are not available to public companies. Further, CCPCs are entitled to a number of tax benefits that are not extended to private companies that are not CCPCs.
[75] This can be seen by contrasting the taxing regime for CCPCs and the taxing regime for private corporations that are not CCPCs.
[76] Most private corporations that are not CCPCs are only subject to the general Part I tax rate of 28% on their taxable income (the “General Tax Rate”). This rate is composed of the 38% tax levied under subsection 123(1) on the taxable income of a corporation, reduced by the federal abatement of 10% of the corporation’s taxable income earned in the year in a province.[60] As I will discuss, in most instances the 28% General Tax Rate is reduced by a further 13% under section 123.4, resulting in a corporate tax rate of 15%.
[77] The calculation of the tax rate for CCPCs is not as straightforward. The applicable tax rate varies depending on the nature and amount of the income. A CCPC must identify its active business income and its aggregate investment income.
[78] A CCPC, at the outset, is liable to pay tax at the 28% General Tax Rate on all of its income. However, the 28% General Tax Rate is reduced for active business income of the CCPC that is eligible for the $500,000 small business deduction. In the relevant years, the portion of the CCPC’s income that was eligible for the small business deduction was subject to an effective tax rate of 11% in 2015 and 10.5% in 2016 (the “Eligible Small Business Tax Rate”).
[79] The CCPC’s business income that is not eligible for the small business deduction is, in most instances, subject to the same 15% tax rate applicable to most private corporations (the General Tax Rate minus the 13% section 123.4 reduction).
[80] The CCPC’s income that is aggregate investment income[61] is, at the time that the income is earned, subject to the 28% General Tax Rate plus an additional refundable tax under section 123.3. This resulted in a CCPC paying, in the year that the aggregate investment income was realized, tax at an effective rate of 34.66% in 2015 and 38.66% in 2016. However, on payment of a dividend, a significant portion of this tax was refunded, resulting in an effective tax rate of 8%.[62] The taxation of a CCPC’s investment income will be discussed in more detail, when I discuss section 123.3.
[81] In summary, a CCPC may be taxed on some of its business income at the same rate as the rate paid by a private corporation that is not a CCPC; it may be taxed on another portion of its business income at a lower rate; and it may be taxed initially on its investment income at a rate this is 10.66% higher than the General Tax Rate, but then taxed at a significantly lower rate on the payment of a dividend.
[82] This specific tax regime for CCPCs is contained in a number of provisions. For example, numerous sections of the Act only apply to corporations that are CCPCs, other sections only apply to corporations that are not CCPCs, and certain sections may apply differently to corporations depending on whether the corporation is a CCPC. These provisions relate to both the taxation of the corporation and the taxation of the shareholders of the corporation.
[83] This can be seen from the following examples:
-Subsection 127(10.1) of the Act provides an additional refundable investment tax credit for scientific research and experimental development expenditures incurred by a CCPC;[63]
-The payment deadline for a corporation’s p