Principal Issues: What is the CRA’s position on the application of the GAAR in a given situation?
Position: None.
Reasons: Question of fact.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2021
APFF CONFERENCE 2021
Question 4
Mind and management and CCPC status
A Corporation which will generate investment income is incorporated under the corporate laws of a foreign jurisdiction.
The central management and control of the Corporation is exercised in Canada. For the purposes of this question, subsection 250(5) does not apply and the Corporation may be considered to be resident in Canada for the purposes of the Income Tax Act.
The Corporation is not a "Canadian-controlled private corporation" ("CCPC") pursuant to subsection 125(7), as it is not a "Canadian corporation" as defined in subsection 89(1).
Since the corporation does not qualify as a CCPC, it will not be subject to the refundable tax on the investment income of a CCPC under section 123.3 and will be entitled to the general tax deduction provided for in subsection 123.4(2).
Question to the CRA
What is the CRA's position with respect to the situation described above, including the application of the GAAR under subsection 245(2)?
CRA Response
The potential application of GAAR under subsection 245(2) requires an analysis of all the facts and circumstances of a particular situation. Since the statement in this question only briefly describes a hypothetical situation, the CRA cannot make a precise or definitive statement on its potential application. That said, we can make the following general comments.
The Supreme Court of Canada teaches us that three conditions must be satisfied for the GAAR in subsection 245(2) to apply (footnote 1). First, there must be a tax benefit that results from a "transaction or series of transactions of which that transaction is a part" within the meaning of subsections 245(1) and 245(2). Second, the transaction that generated the tax benefit must be an avoidance transaction within the meaning of subsection 245(3) - i.e., the transaction must not have been undertaken for bona fide purposes - the obtaining of the tax benefit not being a bona fide purpose for purposes of the rule. Finally, the avoidance transaction must be abusive within the meaning of subsection 245(4).
In the circumstances, the incorporation of the Corporation under the corporate laws of a foreign jurisdiction is a transaction that would provide a tax benefit consisting of the avoidance of the refundable tax on investment income of a CCPC under section 123.3 and the general tax deduction under subsection 123.4(2).
However, without further details, it is difficult to determine whether such a transaction constitutes an avoidance transaction. If the purpose of such a transaction were to avoid CCPC status in order to defeat the purpose and intent of various anti-avoidance rules applicable to investment income, including section 123.3 and subsection 123.4(2), the CRA would consider, depending on the circumstances, the use of the GAAR under subsection 245(2).
Nancy Deslandes
(819) 953-1643
October 7, 2021
2021-090092
Response prepared in collaboration with:
Patrick Bilodeau, Tax Avoidance Division
International and Large Business Directorate
Compliance Programs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Canada Trustco Mortgages v. Canada, 2005 SCC 54, at paragraph 17; Copthorne Holdings Ltd. v. The Queen, 2011 SCC 63, at paragraphs 32 and 33.