With a view to its imminent disposition of the shares of a subsidiary, the taxpayer continued to the British Virgin Islands, with the result that it ceased to be a Canadian-controlled private corporation (CCPC) and became a private corporation that was not a CCPC (its central management and control remained in Canada). CRA assessed on the basis inter alia that the resulting non-application of s. 123.4 (denying the general rate reduction on aggregate investment income) was an abuse of that provision.
After indicating that the absence of a rate reduction under s. 123.4 for aggregate investment income reflected that it was subject to a low rate of tax once distributed as dividends, D’Arcy J noted that there was no abuse regarding the s. 123.4 rate reduction, since the rate reduction it enjoyed for its taxable capital gain reflected the unavailability of a dividend refund (which, when received, reduced the net corporate tax rate to 8% of such aggregate investment income). He stated (at para. 146):
[T]he text indicates that the intention was not to apply the General Rate Reduction to income that was taxed at a rate that was lower than the General Tax Rate of 28% (the 38% general corporate tax rate minus the 10% abatement), such as the income of a CCPC that is either investment income or income that is eligible for the small business deduction or the income of a corporation that is eligible for the manufacturing and processing profit credit.