Treaty Shopping: MIL, MLI And ALTA Things In Between

On February 12, the Federal Court of Appeal (FCA) released its decision in The Queen v. Alta Energy Luxembourg S.a.r.l.1 (Alta Energy), a case that represents an attempt by the Canadian tax authority to relitigate the issue of whether Canada's domestic general anti-avoidance rule (GAAR) can apply to curtail so-called “treaty shopping”.2

What you need to know

The FCA in Alta Energy unanimously upheld the decision of the lower court that the GAAR did not apply to deny the foreign taxpayer's claim for a treaty-based exemption from capital gains tax arising on a sale of shares of a Canadian subsidiary that derived their value from resource properties in Alberta. In the earlier decision of The Queen v. MIL (Investments) S.A.,3 the Canadian tax authority had similarly asserted that the GAAR should apply to deny treaty benefits in a treaty shopping context, without success. The FCA has placed an extremely high bar on applying the GAAR to deny the benefits of an applicable tax treaty where the express requirements to access the treaty benefits are properly established. Historically, Canada's main tool to combat treaty abuse, including treaty shopping, has been the GAAR. However, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) introduces countermeasures to prevent treaty abuse, such as the principal purpose test (PPT). The MLI is an international tax treaty that will modify the majority of Canada's bi-lateral tax treaties to incorporate these countermeasures, with coming-into-effect dates that vary from treaty to treaty. With the MLI now in effect in respect of a number of Canada's tax treaties, notably those with Luxembourg and the Netherlands, it is unclear whether the Canadian tax authorities will look to appeal the Alta Energy decision, which solely involved the GAAR, or consider domestic legislative measures to respond to the decision. The MLI will import the PPT into most of Canada's tax treaties in respect of treaty exemptions for tax on capital gains realized in taxable periods beginning as early as June 1, 2020 (depending on the particular treaty), even if the gains accrued in prior periods. The Alta Energy decision may embolden taxpayers wishing to crystalize accrued gains prior to the coming-into-effect of the PPT, for which there is little guidance and which has yet to be tested before the courts, in reliance upon the existing treaty provisions. Recap

Alta Energy was...