Alta Energy – Federal Court of Appeal Confirms that Treaty Shopping is Not Abusive
In Her Majesty the Queen v. Alta Energy Luxembourg S.A.R.L., the Federal Court of Appeal confirmed that so-called “treaty shopping” is not abusive of Canada’s tax treaties. As a result, Canada’s general-anti avoidance rule (“GAAR”) could not be used to deny the benefit of an exemption (contained in the Canada-Luxembourg tax treaty – “Can-Lux Treaty”) from Canadian tax on the capital gain realized on the disposition by the Luxembourg corporate taxpayer (“Alta Luxembourg”) of shares of an Alberta company (“Alta Canada”).
Distilled to their bare essentials, the facts of this appeal can be summarized as follows:
- In 2011, Alta Canada was incorporated to carry on an unconventional shale oil business in Alberta. The shareholder of Alta Canada was a United States limited liability company (“US LLC”).
- In 2012, the shares of Alta Canada were transferred to Alta Luxembourg. This transfer to Alta Luxembourg was a taxable transaction, but because the fair market value of the transferred shares was equal to their adjusted cost base, there was no capital gain on the transfer. After the transfer, the shares of Alta Luxembourg were held by an Alberta partnership, the partners of which were the same as the members of US LLC.
- In 2013, Alta Luxembourg sold the shares of Alta Canada, realizing a large capital gain.
Alta Luxembourg claimed that the capital gain was not subject to Canadian tax because of the application of provisions of the Can-Lux Treaty by which Canada surrendered its right to tax capital gains realized by a resident of Luxembourg on the disposition of certain private company shares that derive their value principally from immovable property situated in Canada in which the business of the private company is carried on (the “Treaty Exemption”). Before the Federal Court of Appeal, the Minister claimed that there had been an abuse of Canada’s Income Tax Act (Canada) (“Tax Act”) and the Can-Lux Treaty, and therefore GAAR applied to deny the Treaty Exemption on the capital gains realized by Alta Luxembourg. The Court confirmed that GAAR did not apply.
GAAR can apply to deny a tax benefit that results from a transaction if, among other things, the transaction is found to be abusive of the Tax Act or a tax treaty. Canada’s GAAR jurisprudence has made it clear that it is the Minister who bears the legal burden of identifying the object, spirit or purpose of the provisions that are alleged to have been abused. In Alta Energy, the Federal Court of Appeal held that the Minister had not correctly articulated the relevant object, spirit or purpose of the exemption provisions in issue or demonstrated that the provisions had been abused.
For example, the Minister argued that the Treaty Exemption is not intended to benefit entities that do not have the potential to realize income in Luxembourg. The Court rejected this submission, and held that whether Alta Luxembourg had any taxable income in Luxembourg “is a matter for the Luxembourg tax authorities…[i]t is not a matter that is before this Court.” The Court held the Treaty Exemption can be available if the person seeking to claim it is a resident of Luxembourg for purposes of the Can-Lux Treaty (i.e., liable to tax in Luxembourg) and that the “level or amount of tax is not relevant”.
The Minister also argued that the Treaty Exemption is not intended to benefit entities that do not have strong commercial or economic ties to Luxembourg. The Court rejected this submission as well, finding that the Can-Lux Treaty makes “no distinction…between residents with strong economic ties and those with weak or no economic ties.” If a person is a resident of Luxembourg (i.e., liable to tax in Luxembourg), the Treaty Exemption can apply.
In summary, the Court found that the Minister had “not identified any clear rationale” for the Treaty Exemption, “other than what can be gleaned from the text” itself:
 The text of the provisions provides that the exemption from tax in Canada is available to residents of Luxembourg who realize a gain from the sale of shares of a company, if the underlying value of that company is derived from immovable property (other than rental property) used in a business carried on in Canada.
The Court also declined to find that treaty shopping is abusive, agreeing with prior jurisprudence finding that “[t]here is nothing inherently proper or improper with selecting one foreign regime over another” and that though “the selection of a low tax jurisdiction may speak persuasively as evidence of a tax purpose for an alleged avoidance transaction…the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive.”
In the end, the Crown’s appeal was dismissed. Key to the Court’s dismissal were findings that the Treaty Exemption was available to residents of Luxembourg for purposes of the Can-Lux Treaty, that the Treaty Exemption did not require that the Luxembourg resident have any particular level of commercial or economic ties to Luxembourg, and that the Treaty Exemption did not require that the non-resident pay any particular amount of tax in Luxembourg.
 2020 FCA 43.
 Specifically, Articles 13(4) and (5) of the Can-Lux Treaty.