Alta Energy: Canada's Federal Court Of Appeal Rules That Treaty Shopping Is Not Abusive

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...