Alta Energy Luxembourg S.A.R.L. V. The Queen

Alta Energy Luxembourg S.A.R.L. v. The Queen, 1 Case Study

On August 29, 2019, Canada ratified the Multilateral Convention To Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "Convention"). It is intended that the Convention will operate alongside Canada's bilateral tax treaties, 2 but will only apply to a particular bilateral tax treaty if both parties agree and instruments of ratification are deposited with the OECD.

Canada has agreed to modify the preamble to its tax treaties to include the following:

"Intending to eliminate double taxation with respect to taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or tax avoidance (including treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions). 3 The most controversial provision contains a specific anti-abuse rule as follows:

"Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude: having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement." 4

Presumably, the hope of the Canadian government is that the courts will apply these principles when examining a tax plan, rather than concluding the opposite, such as has been the case in Canada, for example in the recent Alta Energy case. 5

In 2011, the Blackstone Group LP, a major private equity fund, and Alta Resources LLC, an industry leader in shale oil and gas exploitation, formed a US LLC to develop a shale property in Northwest Canada. They incorporated a Canadian subsidiary of the LLC, Alta Energy Partners Ltd. ("Alta Canada"), to carry on the Canadian business. When it was determined that this structure was not favourable from a U.S. tax perspective, a reorganization was undertaken in 2012 (the "Reorganization") to transfer the shares of Alta Canada from the LLC to a Luxembourg holding company (the "Taxpayer").

During 2012 and 2013, Alta Canada acquired several drilling and exploration...