Alta Energy Luxembourg - Tax Court (Again) Affirms Taxpayer's Right To Access Treaty Benefits

The Tax Court of Canada has decided in Alta Energy Luxembourg S.A.R.L. v. Her Majesty the Queen that a Luxembourg resident corporation may avail itself of the benefits of the Canada-Luxembourg Income Tax Convention without being subject, for that reason alone, to the general anti-avoidance rule ("GAAR") under Canada's Income Tax Act ("ITA"). In its August 22, 2018 decision, the Court confirmed that a GAAR analysis should not be about labels such as (so-called) "treaty shopping", but rather must be grounded in the text of the applicable statute or treaty. The case also contains an interesting analysis of how the immovable property exception in the Canada-Luxembourg convention functions in the context of the resource sector. While the result was favourable for the taxpayer, the fact that the Crown chose (again) to challenge on the basis of GAAR (in the treaty context) is both noteworthy and troubling. BACKGROUND

The following are some of the key facts in the case:

Alta Energy Partners Canada Ltd. ("Alta Canada") was a wholly-owned subsidiary of Alta Energy Partners, LLC of Delaware. Alta Canada's shares constituted "taxable Canadian property" for ITA purposes because the company was in the business of acquiring and developing Canadian resource properties. In a 2012 restructuring, the shares of Alta Canada were transferred to a related newly-formed Luxembourg company (the "Appellant"). In 2013, the Appellant sold its shares of Alta Canada to an arm's length third party for approximately $680 million. At the time of the sale, Alta Canada owned licenses to explore, drill and extract hydrocarbons over 62,000 acres in Alberta's Duvernay Formation ("Working Interest"). It had also drilled six wells and participated in two other wells as a non-operator. TAXPAYER’S FILING AND MINISTER’S REASSESSMENT

The Appellant filed its Canadian tax returns on the basis that the approximately $380 million capital gain it had realized on the share sale was exempt from tax under the Canada-Luxembourg Income Tax Convention 1999 (the "Treaty"). While Articles 13(4) and (5) of the Treaty establish that Canada retains the right to tax a capital gain arising from the disposition of shares that derive their value principally from immovable property located in Canada, there is an exception (the "Immovable Property Exception") for immovable property in which the company carries on business. Note that there is no comparable exception in the Canada-US tax treaty.

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