Alta Energy: Supreme Court Of Canada Finds That The General Anti-Avoidance Rule Does Not Preclude Treaty Shopping To Avoid Capital Gains Tax

• Published date: 06 December 2021
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Energy and Natural Resources, Energy Law, Trials & Appeals & Compensation, Tax Treaties, Income Tax, Capital Gains Tax
• Law Firm: McCarthy Tétrault LLP
• Author: Tax Perspectives, Prince S. Arora, Matthew Kraemer, Mike Hegedus and Anu Koshal

Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49: In a decision with important implications for multinational corporations doing business in Canada, the Supreme Court of Canada ("SCC") recently held that the general anti-avoidance rule ("GAAR") does not preclude companies from taking advantage of tax treaties that Canada has entered into with other countries to organize their affairs in a tax efficient manner, even where there may be a tenuous economic connection between the taxpayer and the other country.

The SCC's decision is the first time the SCC has ruled on the application of the GAAR to a tax treaty. Key takeaways are:

• So-called "Treaty Shopping" is not per se abusive of the Income Tax Act ("Act") or a tax treaty. Taxpayers are permitted to take advantage of treaties that Canada has entered into with other countries to organize their affairs in a tax efficient manner, so long as the transactions are consistent with the object, spirit, and purpose of the provisions of the treaty and the provisions of the Act relied upon.

• Courts should not "read-in" a requirement that there must be a substantial "economic connection" between a taxpayer and a foreign country in order for the company to receive the tax benefits associated with being resident in that country - unless the Act or the treaty requires such a connection.

• The third branch of the GAAR analysis is concerned with identifying the spirit, object and purpose of the provisions relied upon. The GAAR invites courts to go beyond the text to understand the purpose of a provision but the text plays an important role in ascertaining the purpose of a provision The clear absence in the text of a "sufficient substantive economic connections" requirement in the Treaty is indicative that the spirit of the provision is not to reserve treaty benefits to residents with "sufficient substantive economic connections".

Background

In 2011, two American firms founded an American company for the purpose of acquiring and developing unconventional oil and natural gas properties. That American company in turn created a wholly owned Canadian subsidiary, Alta Energy Partners Canada Ltd. ("Alta Canada"), in order to carry on that business.

Alta Canada was restructured in 2012. As part of the restructuring, Alta Energy Luxembourg S.A.R.L. ("Alta Luxembourg") was incorporated under the laws of Luxembourg and its shares were issued to a new Canadian partnership. On the same day, Alta Luxembourg purchased all of the shares of Alta Canada. In 2013, it sold those shares, realizing a capital gain in excess of $380 million.

The capital gain was reported to the Luxembourg tax authorities and was exempt from tax under...