Treaty Exempt Gain By Luxembourg Holding Company Upheld By Federal Court Of Appeal

In Canada v Alta Energy Luxembourg S.A.R.L.,1 the Federal Court of Appeal (FCA) confirmed there was no abusive tax avoidance under Canada's general anti-avoidance rule (GAAR) where the taxpayer, a Luxembourg-resident company, relied on the tax convention between Canada and Luxembourg (the Treaty) to exempt a capital gain from Canadian income tax.2 The FCA found a clear policy in the text of the Treaty, such that it should apply to all residents of the contracting states, and refused to read in additional requirements that would preclude certain residents - such as those with weak commercial or economic ties to the residence country - from obtaining Treaty benefits.

The salient facts for the purpose of the appeal may be summarized as follows:3

The taxpayer was a company incorporated and resident in Luxembourg, all the shares of which were held by a limited partnership; the members of which were generally not Luxembourg residents. The taxpayer held shares in a Canadian company (Canco), which it acquired through a restructuring in 2012. Canco, in turn, held a working interest in Canadian resource properties (oil and gas leases in Alberta), in which it carried on exploration and production activities. In 2013, the taxpayer sold the shares of Canco, realizing a capital gain of over $380 million. The taxpayer relied on certain Treaty provisions to exempt the gain on the Canco share sale from being taxable in Canada, the effect of which the FCA succinctly summarized as follows:

[47] Articles 13(4) and (5) of the Luxembourg Convention provide that a person who has sold shares of a private Canadian corporation that comprise part of a substantial interest (i.e. 10% or more) of the shares of any class of that corporation will not be subject to tax in Canada on the gain realized on such disposition, if the following conditions are satisfied:

(a) the person is a resident of Luxembourg; and

(b) the value of those shares is derived principally from immovable property (other than rental property) in which the business of the corporation is carried on.

In the decision under appeal, the Tax Court found that the taxpayer was a resident of Luxembourg and that the Canco shares derived their value principally from immovable property in which its oil and gas exploration and production business was carried on. The Tax Court also concluded that GAAR did not apply to deny the applicable Treaty benefits.

The Minister of National Revenue's (the Minister) appeal to the...