Income Tax Update From The Supreme Court Of Canada: The GAAR Does Not Apply To Treaty Shopping

• Published date: 02 December 2021
• Subject Matter: Tax, Tax Treaties, Income Tax
• Law Firm: Bennett Jones LLP
• Author: Mr Edwin G. Kroft

The Duke of Westminster Principle Still Lives On for Tax Planning

On November 26, 2021, the Supreme Court of Canada released its decision and reasons in Her Majesty the Queen and Alta Energy Luxembourg S.A.R.L., 2021 SCC 49. This case involved the application of the General Anti Avoidance Rule (GAAR) in section 245 of the Income Tax Act and "treaty shopping." The taxpayer was successful with the judges splitting 6-3 in their views. The reasons of the majority and the minority are both interesting to read for many reasons. What resonated with me were general comments about the GAAR and about the "Duke of Westminster" principle (The Duke) pertaining to tax planning. The well-accepted Duke of Westminster principle states that "taxpayers are entitled to arrange their affairs to minimize the amount of tax payable."

The Duke Still Lives On!

Paragraphs 29 and 30 of the Majority Reasons written by Justice C'té state:

"[29] Like all statutes, tax legislation must be interpreted by conducting a "textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole" (Canada Trustco, at para. 10). However, where tax provisions are drafted with "particularity and detail", a largely textual interpretation is appropriate in light of the well-accepted Duke of Westminster principle that "taxpayers are entitled to arrange their affairs to minimize the amount of tax payable" (Canada Trustco, at para. 11, citing Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)). This principle, derived from the rule of law, has been deemed the "foundation stone of Canadian law on tax avoidance" (B. J. Arnold, "Reflections on the Relationship Between Statutory Interpretation and Tax Avoidance" (2001), 49 Can. Tax J. 1, at p. 3).

[30] This established principle was affected by the enactment of s. 245 of the Act, also known as the GAAR, which "superimposed a prohibition on abusive tax avoidance, with the effect that the literal application of provisions of the Act may be seen as abusive in light of their context and purpose" (Canada Trustco, at para. 1). Thus, if the Minister can establish abusive tax avoidance under the GAAR, s. 245 of the Act will apply to deny the tax benefit even where the tax arrangements are consistent with a literal interpretation of the relevant provisions (Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721, at para. 66). The GAAR applies both to the abuse of provisions found in the Act and...