No — but not for the reason often assumed. In Somerset Limited v. The King, 2026 TCC 123, the Tax Court held that Somerset remained a Canadian-Controlled Private Corporation (CCPC) after continuing from British Columbia to the British Virgin Islands (BVI), so the additional refundable tax on investment income under section 123.3 of the Income Tax Act still applied to its 2019–2021 taxation years. The Court’s primary reasoning was a technical one, specific to paragraph 89(1)(b) of the “Canadian corporation” definition and a corporate-continuance deeming rule — not a general principle that offshore continuances never affect CCPC status. As a fully argued alternative, the Court also found that GAAR would have denied the tax benefit even if the technical argument had gone the other way.
The Facts
Somerset Limited was incorporated in British Columbia in 1943 and had operated continuously as a CCPC, holding long-term investments including two Vancouver apartment buildings. In October 2018, Somerset agreed to sell those buildings for roughly $34 million. Before closing, Somerset was continued (redomiciled) from BC into the BVI, effective December 10, 2018 — followed by incorporation of four related holding companies, a share transfer from the four individual shareholders to those holding companies, and payment of dividends exceeding Somerset’s general rate income pool. Somerset conceded that avoiding the section 123.3 refundable tax on investment income was the primary purpose of the continuance (agreed facts, paras 20, 74–76).
The Technical Question: What Makes a Corporation “Canadian” After It Moves?
To be a CCPC, a corporation must first be a “Canadian corporation” as defined in subsection 89(1) of the Income Tax Act. That definition has two independent branches, joined by a disjunctive “or”: paragraph (a) covers corporations actually incorporated in Canada; paragraph (b) covers corporations resident in Canada continuously since June 18, 1971 that were not incorporated in Canada (paras 23–24, 29–32). Paragraph (b) is, in substance, a grandfathering rule for older, foreign-incorporated-but-Canadian-resident corporations dating to the 1971 tax reform.
Before the continuance, Somerset satisfied paragraph (a) (incorporated in Canada) but not (b). After the continuance, subsection 250(5.1) of the Act deemed Somerset to have been incorporated in the BVI — and, critically, that deeming rule applies retroactively to the corporation’s original incorporation date, which for Somerset was 1943 (paras 38–44). Because Somerset had therefore been “resident in Canada” continuously since well before June 18, 1971 while being deemed not incorporated in Canada, it now satisfied paragraph (b) instead of paragraph (a). It never stopped meeting the “Canadian corporation” definition — it simply moved from one branch of the definition to the other (para 44).
This is the crux of why the case is narrower than “continuances don’t work”: paragraph 89(1)(b) can only rescue the Crown’s position for a corporation old enough to have been continuously Canadian-resident since June 18, 1971. A CCPC incorporated after that date, attempting the same continuance, could not be caught by paragraph (b) on the same reasoning, because it would not have existed for the full period the paragraph requires. Whether such a corporation would successfully shed CCPC status on the 89(1) analysis alone is a different, unresolved question — and, as discussed below, GAAR would still need to be considered.
The GAAR Backstop — an Alternative Finding, Not the Basis for the Result
Because the Court found Somerset remained a CCPC on the statutory interpretation issue, it did not need to decide the GAAR question to resolve the appeal (para 46). The Court alternatively concluded that GAAR would have denied the tax benefit if its primary statutory interpretation were wrong (para 47). Applying the Federal Court of Appeal’s GAAR framework from Canada v. DAC Investment Holdings Inc., 2026 FCA 35 (a similar continuance case), the Court found the continuance frustrated the object, spirit and purpose of both section 123.3 and section 123.4 — provisions designed to prevent income earned through a CCPC from deferring tax relative to income earned directly (paras 53–61).
Somerset also argued its situation was distinguishable from DAC because an “alternative transaction” existed — it could, in theory, have incorporated outside Canada from the start, back in 1943. The Court rejected this as not a genuine alternative: it was not contemporaneous with the actual transaction and amounted to asking the Court to rewrite 83 years of corporate history (paras 69–74).
Why the Distinction Matters for Advisors
Treating this case as authority that “any offshore continuance fails to change CCPC status” would overstate it. The technical result here depended on Somerset’s age and the specific mechanics of the 89(1)(b) grandfathering rule interacting with the deeming provision in subsection 250(5.1). For a modern corporation, the technical analysis could differ. GAAR would still require separate consideration based on the transaction’s purpose, timing, and surrounding facts. On Somerset’s own facts, the pre-sale continuance undertaken primarily to avoid section 123.3 tax was found to frustrate the purpose of that regime, and the taxpayer’s proposed “alternative transaction” defence failed. Any client considering a pre-sale continuance or reorganization should have both questions — the technical CCPC analysis and the GAAR analysis — addressed separately and explicitly, in advance.
FAQ
Does continuing a corporation out of Canada always end its CCPC status?
No, and this case doesn’t establish that. Somerset’s continuance failed on a narrow technical ground tied to its 1943 incorporation date and a specific grandfathering rule in paragraph 89(1)(b) of the Income Tax Act. A newer corporation’s technical position could differ.
What is paragraph 89(1)(b) of the “Canadian corporation” definition?
It’s a branch of the definition that captures corporations not incorporated in Canada but resident in Canada continuously since June 18, 1971. It generally only affects corporations old enough to have existed and been Canadian-resident before that date.
Was GAAR the reason Somerset lost?
No. The Tax Court decided the case on the technical “Canadian corporation” question and found it unnecessary to rule on GAAR. It went on to address GAAR only as an alternative finding, concluding it would have applied if the technical argument had succeeded.
Can a taxpayer avoid GAAR by pointing to an alternative transaction that would have worked?
Sometimes, but the alternative must be a realistic, contemporaneous option with comparable commercial and tax results. The Court rejected Somerset’s proposed alternative (incorporating outside Canada in 1943) as not genuinely available.
Would the same result apply to a corporation incorporated after 1971?
Not necessarily. A corporation incorporated after June 18, 1971 could not satisfy paragraph 89(1)(b) on the same reasoning because it could not have been resident in Canada continuously throughout the required period. Its technical CCPC status would require a separate analysis, and GAAR would also need to be considered independently based on the transaction’s purpose and surrounding facts.
What should a private corporation do before continuing to another jurisdiction ahead of a sale?
Get advice on both questions separately: whether the corporation would technically remain a “Canadian corporation” under subsection 89(1), and whether GAAR could apply independently of the technical answer. Document the genuine business purpose, if any, contemporaneously.
Practical Takeaways
- This decision turned on a narrow, date-specific rule (paragraph 89(1)(b), combined with the continuance deeming rule) that mainly affects corporations resident in Canada since before June 18, 1971 — it is not a blanket rule against offshore continuances.
- GAAR was unnecessary to the result, but the Court alternatively concluded that it would have applied on Somerset’s facts.
- A proposed “alternative transaction” defence to GAAR failed because it was not realistic or contemporaneous with the actual transaction.
Corporate continuance and residency questions are one part of a broader international tax practice; see our Canadian International Tax Services for the complete picture.
Considering a Corporate Continuance or Reorganization?
The technical CCPC and GAAR implications of a corporate continuance depend heavily on the specific facts. Lepore & Company advises Canadian corporations on continuances, CCPC status, and CRA reviews of corporate transactions.
This article discusses a single Tax Court of Canada decision and is provided for general informational purposes only. It does not constitute legal, tax, or accounting advice. The technical outcome in this case depended on facts specific to this corporation, including its 1943 incorporation date. Please contact Lepore & Company or a qualified professional before undertaking any corporate continuance, reorganization, or similar transaction.