Federal Court of Appeal Applies GAAR to CCPC Planning in DAC Investment Holdings

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On February 20, 2026, the Federal Court of Appeal (“FCA”) released its decision in Canada v. DAC Investment Holdings Inc., 2026 FCA 35 (“DAC”), overturning the Tax Court of Canada’s (“TCC”) conclusion that a corporate continuance undertaken to exit the Canadian‑controlled private corporation (“CCPC”) regime did not constitute abusive tax avoidance.

Notwithstanding Parliament’s recent amendments to the general anti-avoidance rule (“GAAR”), the FCA’s decision engages a longstanding, and likely enduring, tension in GAAR jurisprudence: namely the inherent difficulty of the misuse or abuse inquiry where the dispute centres on what is ostensibly an “objective” classification. In such cases, the analysis is highly sensitive to how the relevant legislative purpose is articulated, such that a singular set of facts can yield opposite outcomes under the same analytical framework.

Background

The taxpayer in DAC was a former CCPC that was continued from Ontario to the British Virgin Islands shortly before the disposition of shares with an accrued gain. As a result of the continuance, subsection 250(5.1) of the Income Tax Act (Canada) (the “Act”) deemed the corporation to be incorporated outside Canada, such that it ceased to be a “Canadian corporation” and, by extension, no longer qualified as a CCPC. The taxpayer remained resident in Canada but reported the gain as a private corporation that was not a CCPC and, as a result, was not subject to the refundable tax on investment income under section 123.3 and gained access to the general rate reduction under section 123.4.

The TCC held that the transactions were not abusive, reasoning that Parliament had deliberately created different tax regimes for different types of corporations and that the taxpayer had simply arranged its affairs to move from one regime to another. In the TCC’s view, that line‑drawing choice was for Parliament, not the courts, to revisit.

The FCA’s GAAR Analysis

The FCA disagreed with the TCC’s analysis on the object, spirit and purpose of the relevant provisions and held that the GAAR applied. While accepting that the anti‑deferral measures in sections 123.3 and 123.4 are directed specifically at CCPCs, the FCA concluded that the transactions nevertheless frustrated the object, spirit and purpose of those provisions, as well as subsection 250(5.1) of the Act. In the FCA’s view, the TCC framed the provisions’ purpose at too high a level of generality, emphasizing broad notions of integration and systemic coherence within the corporate tax regime rather than the targeted anti‑deferral function of the CCPC investment‑income regime and the taxation of income already subject to incentivized rates.

Against that backdrop, the FCA characterized the continuance as a purely formal step undertaken solely to circumvent the CCPC anti‑deferral regime, without any corresponding change in the taxpayer’s economic or commercial reality. The result, the FCA held, was to render the anti‑deferral rules effectively elective, undermining the established policy that individuals should not be able to defer tax on investment income by interposing a corporation.

Takeaways

The stark divergence between the TCC and the FCA highlights a persistent concern with the GAAR framework itself. Specifically, as a blunt instrument, the GAAR offers limited constraints at the abuse stage, permitting outcomes to turn decisively on how legislative purpose is framed. In DAC, the TCC viewed CCPC status as a deliberate and meaningful dividing line drawn by Parliament, emphasizing that the Act expressly contemplates corporations moving between regimes and attaching different tax consequences to each. The FCA, by contrast, viewed the planning as exploiting that boundary in a way that defeated the rationale underlying the CCPC investment income regime, even though the taxpayer complied with the literal requirements of the provisions. These opposing conclusions were reached while drawing on the same legislative history and policy context.

In addition to its abuse analysis, the FCA also addressed a separate issue relating to the scope of GAAR remedies. The taxpayer argued that if GAAR applied, it would be reasonable to treat it as a CCPC for purposes of the “normal reassessment period,” with the result that the reassessment at issue would be statute‑barred. The FCA rejected that argument, holding that subsection 245(2) limits GAAR adjustments to those necessary to deny the tax benefit obtained, and adjusting the applicable limitation period did not, according to the FCA, fall within that scope.

The FCA’s decision in DAC illustrates the continuing uncertainty around the boundaries of permissible tax planning where Parliament has drawn bright lines between regimes but has not expressly foreclosed the planning opportunities that may arise as a result. Whether leave to appeal to the Supreme Court of Canada will be sought remains to be seen. The issue is of more than academic interest as a number of similar appeals involving CCPC planning remain in the pipeline.

The Tax Controversy/Tax Litigation Team at Aird & Berlis LLP provides strategic guidance on CCPC status planning, cross-border continuances, investment income taxation and GAAR risk, including representation before the Canada Revenue Agency and all levels of court. For more information, please reach out to the author or a member of the group.