Deans Knight: The Supreme Court Of Canada Applies The General Anti-Avoidance Rule To Supplement A Well-Established Specific Anti-Avoidance Provision

Law FirmMcCarthy Tétrault LLP
Subject MatterCorporate/Commercial Law, Energy and Natural Resources, M&A/Private Equity, Energy Law
AuthorTax Perspectives, Brett Anderson, Dominic Bédard-Lapointe, Anu Koshal, Daniel A. Downie and Robert Celac
Published date05 June 2023


On Friday, May 26th, 2023, the Supreme Court of Canada ("SCC") released its much anticipated decision in Deans Knight Income Corporation v. His Majesty the King.1 A 7-1 majority applied the general anti-avoidance rule ("GAAR") in section 245 of the Income Tax Act (Canada) ("Act") and concluded that Deans Knight Income Corporation's (the "Taxpayer") use of tax attributes to shelter income from a new business abused subsection 111(5), even though it did not undergo a change in de jure control.

The decision has several important implications for taxpayers and is liable to create further uncertainty as to when the GAAR might apply:

  • First, the majority held that the GAAR is not limited to unforeseen tax strategies. Even where Parliament knew about a specific tax strategy (e., loss trading), implemented a specific anti-avoidance rule to prevent that strategy (i.e., 111(5)), and the taxpayer complied with the text of that rule, the GAAR can still apply.
  • Second, taxpayers should beware of relying too much on the text of the statute in a GAAR case, even when it is clear. The text is only the means by which Parliament sought to achieve the objective of a particular provision, but it is not exhaustive of that objective. Extrinsic aids, including legislative history, play a significant role in determining the object, spirit, and purpose of the provisions at issue.


The Taxpayer was a public corporation with unused non-capital losses and other deductions ("Tax Attributes"). In 2008, facing financial difficulties, the Taxpayer entered into an agreement ("Investment Agreement") with an arm's length company, Matco Capital Ltd. ("Matco"), to monetize its Tax Attributes.

Pursuant to the Investment Agreement, the Taxpayer transferred its assets to a newly incorporated parent company ("New Forbes"), and New Forbes also assumed the Taxpayer's liabilities. Matco then purchased a convertible debenture issued by the Taxpayer for $3 million that could be converted into a minority percentage (35%) of the voting shares of the Taxpayer and non-voting shares, which together represented 79% of the equity in the Taxpayer. Matco began a search for an income-generating business opportunity that could allow the Taxpayer to make use of the Tax Attributes to offset income from a new line of business (a "Corporate Opportunity").

The arrangement was structured so that neither Matco nor anyone else could acquire de jure control of the Taxpayer, since an acquisition of de jure control would trigger the application of subsection 111(5) and prevent the use of the Tax Attributes to offset income from a new line of business. While the Investment Agreement was carefully drafted and did not trigger an acquisition of de...

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