Back to all publications
Feb 14, 2020

Alta Energy: Canada’s Federal Court of Appeal Rules That Treaty Shopping is Not Abusive

By Jack Bernstein, Francesco Gucciardo, Barbara Worndl and Tyler Brent

The Federal Court of Appeal in Alta Energy1 held that the Appellant, a Luxembourg corporation, could properly rely on the Canada-Luxembourg Treaty (the “Treaty”) to claim an exemption from Canadian tax on a capital gain realized on the sale of shares of a Canadian corporation engaged in oil and gas exploration.2 The Appellant came to hold those shares as a result of an international restructuring. The original holder, a Delaware LLC, did not have access to any such exemption. As part of the restructuring, the Appellant was formed and the subject shares were transferred to it at a time when there was no accrued gain. The Appellant later sold the shares at a substantial gain and claimed the exemption. The only issue in the appeal was whether the general anti-avoidance rule (“GAAR”) applied to deny the Appellant from claiming the exemption for Canadian tax in the Treaty.

The discrete question considered by the Court was whether the restructuring transactions resulted in an abuse of the Income Tax Act (Canada) or the Treaty for purposes of the application of the GAAR. The Court ruled that there was no abuse while discrediting the myth of a need for “substance” in the process.

Importantly, the Federal Court of Appeal clearly stated that treaty shopping in and of itself is not abusive of bilateral tax conventions. At paragraph 78 of the decision, the Court recited the statements made by Justice Woods in MIL (Investments) S.A.3 In particular, that:

…there is nothing inherently proper or improper with selecting one foreign regime over another…the selection of a low tax jurisdiction may speak persuasively as evidence of a tax purpose for an alleged avoidance transaction, but the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive. It is the use of the selected treaty that must be examined.”

In Alta Energy, the Court acknowledged that the Crown’s arguments were properly focused on the particular provisions of the Treaty. However, in examining the relevant provisions of the Treaty, the Court “was unable to find any rationale behind Article 13(4) and the related provisions of the [Treaty], other than as reflected in the words chosen for these provisions.”4

The Court did not accept the Crown’s argument that the taxpayer itself needed to make an investment in the Canadian company and underlying assets of the business in order to obtain the benefits of the Treaty. Given that the lower Court had concluded that the exemption exists in order to exempt residents of Luxembourg where there has been an “investment” in property, the Crown argued that an investment by the taxpayer in the underlying property is required in order to claim the exemption. The Court noted that the words of the Treaty state that the benefits of the Treaty applied to Luxembourg residents (as that term is defined in the Treaty), not investors.5 To this end, the Court wrote at paragraph 46 of its judgment, “[w]hile GAAR can change the tax consequences from what they would otherwise be, the GAAR cannot be used, in this case, to justify adding a requirement for investment that is not present in the [Treaty].”6

Interestingly, the Court confirmed that nothing beyond being a “resident” is required to access the Treaty, writing at paragraph 65, “[t]here is no distinction in the [Treaty] between residents with strong economic or commercial ties and those with weak or no commercial or economic ties. If a person satisfied the definition of resident in Article 4, then that person is a resident for purposes of Articles 13(4) and (5). (emphasis added)”7

Turning to an examination of abuse specifically, having regard to the object, spirit and purpose of the impugned provisions, the Court’s finding is succinctly summarized at paragraph 73 of the decision, which states:

The object, spirit and purpose of Articles 1, 4 and 13(4) is that a person will qualify for the exemption in issue…if:

(a) that person is a resident of Luxembourg for the purposes of the [Treaty], and

(b) the value of the shares is principally derived from immovable property (other than rental property) situated in Canada in which the business of that corporation is carried on.

These requirements were derived solely from the Court’s interpretation of the text of the Treaty. Since the taxpayer satisfied these requirements, the Court found that the taxpayer was entitled to the exemption from Canadian tax provided in the Treaty.

Importantly, this decision was made without reference to the MLI8 and the principal purpose test (“PPT”) adopted by Canada therein, which was not in effect at the time of the transaction in question. It will be interesting to see if, and how, a court would apply the PPT in this case. The PPT requires that it be shown that the granting of a tax benefit be in accordance with the object and purpose of the provisions of the Treaty. Given the Court’s finding at paragraph 73, as reproduced above, one might be inclined to believe that the Court would have found in favour of the taxpayer in applying the PPT. However, it remains to be seen what impact, if any, the amended preamble (e.g. that tax treaties are intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance) will have on a court’s assessment of the object, spirit and purpose of a tax treaty and its provisions.

The decision is subject to a possible appeal to the Supreme Court of Canada.


1 Canada v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 43 (“Alta Energy”) affirming the decision of the Tax Court of Canada in 2018 TCC 152.

2 Under the Treaty, Canada only has the right to tax a resident of Luxembourg on a gain realized in connection with the sale of shares where, among other things, the value of the shares is derived principally from immovable property situated in Canada. Article 13(4) of the Treaty (unlike most of Canada’s treaties) excludes from the definition of “immovable property” a property in which the business of the resident is carried on. In this case, the lower court found that the underlying property of the Canadian corporation was so used.

4 Alta Energy at paragraph 73.

5 Alta Energy at paragraph 40.

6 Alta Energy at paragraph 46.

7 Alta Energy at paragraph 65.

8 Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”).

Areas of Expertise

Related Publications

Publications Article
Court Enforces Exculpatory Clause Dismissing Condominium Class Action By Steve J. Tenai, Brian Chung and Martin Henderson Jul 03, 2020 Over the last several years, we have seen the cancellation of several significant condominium dev... Over the last several years, we have seen the cancellation of several significant condominium developments. In response, for projects going to market after January 1, 2020, Tarion now requires that agreements of purchase and sale include an information sheet at the front of the purchase ...
Publications Article
Using the ATM to Avoid the Teller – The CSA Approves Amendments to Streamline ATM Offerings By Liam Tracey-Raymont and Portia Biswas Jul 02, 2020 The Canadian Securities Administrators have approved amendments to National Instrument 44-102 – S... The Canadian Securities Administrators have approved amendments to National Instrument 44-102 – Shelf Distributions (“NI 44-102”) and Companion Policy 44-102CP Shelf Distributions relating to At-the-Market Distributions that eliminate the requirement for reporting i...
Publications Article
A Stark Warning to Candidates for Municipal Office When Filing Their Campaign Election Statements By John Mascarin and Matthew Patterson Jul 02, 2020 The Ontario Court of Appeal made headlines recently when it released its decision in Karygiannis ... The Ontario Court of Appeal made headlines recently when it released its decision in Karygiannis v. Toronto (City), 2020 ONCA 411, removing Toronto City Councillor Jim Karygiannis from office for the second time this term.