Anti-deferral rules cannot be made elective, the court warned in this stinging reversal
The Federal Court of Appeal ruled that a Canadian holding company abused tax rules by moving to the British Virgin Islands.
In Canada v. DAC Investment Holdings Inc., the court reversed a Tax Court decision and held that the general anti-avoidance rule applied to transactions designed to sidestep tax on a multi-million-dollar capital gain. The case was heard at Toronto on October 7, 2025, and judgment was delivered at Ottawa on February 20, 2026. The original reasons for judgment were authored by Woods J.A., who has since retired from the court, with amended reasons delivered by Mactavish J.A. and concurred in by Walker J.A. The amended reasons are being given by the remaining members of the panel in accordance with subsection 45(3) of the Federal Courts Act.
The facts centred on David Civiero, who has been the sole director and has held directly or indirectly at least 50% of the common shares of DAC since its incorporation under the Business Corporations Act (Ontario) on September 11, 2001, and resided in Ontario at all material times. In or around October 2011, Civiero acquired convertible promissory notes from Soberlink, Inc., which were subsequently converted into common shares, and he purchased additional Soberlink shares on or around June 26, 2013.
On or around December 31, 2013, Jacal Holdings Ltd. – a company Mr. Civiero has solely directed and wholly owned since its incorporation on December 11, 1996 – acquired all of his Soberlink shares. On October 3, 2014, Soberlink received a non-binding indication of interest from a potential buyer.
On April 14, 2015, DAC acquired the Soberlink Shares from Jacal pursuant to a section 85 rollover, and on that date, the Shares were DAC's only assets. At the time of the transfer, and since their respective incorporation dates, DAC and Jacal were each a Canadian-controlled private corporation. On April 15, 2015, Soberlink's CEO informed Mr. Civiero that the sale of a division of Soberlink was close to completion and that, to effect this sale, the Soberlink Shares would be sold to a third party.
On April 29, 2015, DAC was continued into the British Virgin Islands as a company incorporated under the BVI Business Companies Act, 2004. As a result, DAC's 2015 taxation year ended on April 28, 2015, and the BVI Companies Act applied as if DAC had been incorporated under that statute. At all relevant times following the continuance, DAC's central management and control remained in Ontario.
On May 14, 2015, DAC sold the Soberlink Shares to an arm's length party and realized a capital gain of $2,359,295, reporting a taxable capital gain of $1,179,648. DAC filed its return for the year ended April 30, 2016 on the basis that it was a corporation resident in Canada subject to tax on its worldwide income, a "private corporation" as defined in subsection 89(1), and not a CCPC.
By notice of reassessment dated December 23, 2020, the Minister increased Part I tax by $239,219 and assessed arrears interest of $57,935.19. The $239,219 increase resulted from two changes: assessing refundable tax on a CCPC's investment income under section 123.3 of $91,003, and denying the general rate reduction under section 123.4 of $148,216.
DAC conceded that it received a tax benefit and that the rollover and the BVI continuance were avoidance transactions. The Tax Court allowed DAC's appeal, and the Crown appealed.
The Federal Court of Appeal found that the result of the transactions is to defeat Parliament's objective that an individual not be allowed to defer tax on investment income by holding investments in a corporation. The court declined to decide the Crown's main argument – whether the object, spirit and purpose of the anti-deferral measures extends to all private corporations and not just CCPCs – leaving that issue for another case, and assumed without deciding that it does not extend further than CCPCs.
The court held that the continuance into the BVI had nothing to do with developing ties or business interests in the BVI, and that DAC remained a resident of Canada because its central management and control remained in Canada. Aside from obtaining the tax benefits, the continuance was virtually inconsequential. The use of subsection 250(5.1) was simply the means to achieve tax benefits, which was not its object or purpose. The court agreed with the Crown that the anti-deferral measures become elective in practice if circumvented so easily – a result Parliament did not intend.
The parties agreed that the tax benefits are derived from section 123.3 not being applicable and section 123.4 being applicable to DAC following its continuation, and the Crown acknowledged at the hearing that DAC likely would be allowed dividend refunds if dividends are actually paid.
DAC argued that, should the GAAR apply, the normal three-year reassessment period for a CCPC should apply instead of DAC's actual four-year period, which would render the reassessment statute barred. The court found that adjustment was not within the scope of permitted adjustments under subsection 245(2). The court also noted that Parliament amended the Income Tax Act effective in 2022 to address tax planning of this nature but drew no inference as to legislative intent from that change.
The appeal was allowed with costs, the Tax Court judgment was set aside, and, making the judgment the Tax Court should have made, the appeal in the Tax Court was dismissed with costs.
