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Alta Energy: Supreme Court of Canada finds that the General Anti-Avoidance Rule Does Not Preclude Treaty Shopping to Avoid Capital Gains Tax

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”.


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 Luxembourg’s domestic laws. In Canada, Alta Luxembourg claimed an exemption from Canadian tax on the basis that the gain should not be included in its “taxable income earned in Canada” under paragraph 115(1)(b) of Act because the shares were “treaty‑protected property” under Article 13(4) and (5) of the Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (“Treaty”). Article 13(4) of the Treaty provides an exemption for residents of Luxembourg from Canadian tax arising from a capital gain on the sale of shares the value of which is derived principally from immovable property situated in Canada and in which the business of the company was carried on. 

The Minister denied the treaty exemption on the basis that the business property exemption in Article 13(4) of the Treaty did not apply and, in the alternative, if the shares did qualify as treaty‑protected property, that the GAAR in section 245 of the Act should apply. 

Lower Court Decisions[1]

At the trial level, the Tax Court of Canada (“Tax Court”) held that the Taxpayer was entitled to treaty benefits on capital gains and that the GAAR did not apply. The Tax Court interpreted the Treaty such that the gains were not taxable in Canada. Instead, Article 13(5) of the Treaty applied, which entitled only Luxembourg as the state of residence, to tax the capital gain. 

The Minister raised three arguments on appeal: (1) a Luxembourg taxpayer must make an investment in Canada in order to claim the exemption; (2) a taxpayer may only access the exemption if it actually pays tax on the capital gain in its country of residence; and (3) the exemption should only benefit Luxembourg residents who have commercial or economic ties to Luxembourg. 

The Federal Court of Appeal (“FCA”) rejected all three arguments. The FCA found that the object, spirit and purpose of the Treaty is reflected in the clear and simple text of the Treaty. The FCA concluded that the provisions operated as intended, and therefore, the transactions were not abusive. 

The FCA did, however, depart from the Tax Court decision in concluding that its decision did not rely on the fact that the Department of Finance could have taken steps to curtail treaty shopping. Interestingly, the FCA in Alta Energy commented that the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting the Multilateral Instrument (“MLI”) may be applicable to future similar transactions. The MLI was not in force at this time.[2] The MLI has introduced a broad anti-avoidance “principal purpose test” (“PPT”) that will generally disallow a treaty benefit where obtaining a benefit was a “principal purpose” of a particular transaction or arrangement, unless granting the benefit is in accordance with the object spririt and purpose of the applicable treaty provision. At present, there is very little guidance on how the PPT will be applied and what its impat may have been (had it applied) in the circumstances of Alta Energy

For more information on the MLI, please see the following McCarthy Tétrault Tax Perspectives blog post: MLI Big Picture Changes Update 2.0

The Supreme Court of Canada Decision[3]

The Crown was granted leave to appeal the FCA’s decision. On appeal to the SCC, the Minister raised two main arguments: 

  • the FCA had failed to conduct the proper GAAR analysis, and improperly focused on the text of the Treaty when determining object, spirit and purpose of the provisions relied upon; and 
  • the Taxpayer engaged in “treaty shopping” because it had limited economic or commercial ties to Luxembourg, and was simply trying to get the benefit of Canada-Luxembourg treaty without actually conducting business in Luxembourg and that “treaty shopping” is an abuse of the Act or Treaty. 

The Taxpayer raised two main arguments in response: 

  • the text of the Treaty provisions was clear and the rationale for the relevant provisions can be found in the text of these provisions. A textual, contextual and purposive analysis of those provisions does not indicate any purpose of the provisions beyond found in the plain words of the text in the Treaty provisions; and 
  • the Minister, in seeking to have the GAAR apply, was attempting to add a limitation on accessing Treaty benefits to corporations with “sufficient substantive economic connections” to their country of residence, which limitation is not present in the words of the Treaty. 

In a 6-3 decision, the majority of the SCC sided with the Taxpayer and dismissed the appeal. Madame Justice Côté writing for the majority, agreed with the FCA that there was a tax benefit and an avoidance transaction (thus the first two branches of the GAAR test were satisfied). However, the SCC held that the avoidance transaction was not abusive and therefore the GAAR did not apply. The SCC did agree wit the Minister’s assertion that the Taxpayer was created to take advantage of the exception from the source country’s right to tax capital gains contained in Article 13(4) of the Treaty. Further, the SCC held that the Minister failed to discharge her burden of proving abusive tax avoidance and that the Taxpayer complied with not only the text but the object, spirit, and purpose of the Treaty. Canada established this Treaty to encourage investments by Luxembourg residents in Canada, even if those residents did have “sufficient substantive economic connections” to Luxembourg. The GAAR cannot be used to now impose that additional criteria to obtain treat benefits: 

Canada’s decision to forego its right to tax such capital gains realized in Canada was based on economic considerations broader than generating tax revenues. Tax law is designed not only to bring revenues into a state’s coffers but also to incentivize or disincentivize certain behaviours (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 53). Indeed, in agreeing to include the carve-out in the Treaty, Canada sought to encourage investments by Luxembourg residents in business assets embodied in immovable property located in Canada (e.g. mines, hotels, or oil shales) and to reap the ensuing economic benefits. This incentive was never intended to be limited to Luxembourg residents with “sufficient substantive economic connections” to Luxembourg.[4]

The SCC reviewed the text of the relevant Treaty provisions, namely Article 4; 13(1); 13(4) and 13(5) and concluded as follows: 

[…] the object, spirit, and purpose of the carve-out provided for in art. 13(4) and (5) of the Treaty are to foster international investment by exempting residents of a contracting state from taxes in the source state on capital gains realized on the disposition of immovable property in which a business was carried on, or on the disposition of shares whose value is derived principally from such immovable property.[5]

The SCC expressly held that so-called “treaty shopping” is not necessarily abusive, and cautioned that courts should be reluctant to use the GAAR to impose value judgments as to what they think may be “right” or “wrong” when it comes to tax law and policy. That is the role of the legislature, not the courts:

A final note on the Minister’s implication that treaty shopping arrangements are inherently abusive. A broad assertion of “treaty shopping” does not conform to a proper GAAR analysis. In accordance with the separation of powers, developing tax policy is the task of the executive and legislative branches. Courts do not have the constitutional legitimacy and resources to be tax policy makers (Canada Trustco, at para. 41). It is for the executive and legislative branches to decide what is right and what is wrong, and then to translate these decisions into legislation that courts can apply. It bears repeating that the application of the GAAR must not be premised on “a value judgment of what is right or wrong [or] theories about what tax law ought to be or ought to do” (Copthorne, at para. 70). Taxpayers are “entitled to select courses of action or enter into transactions that will minimize their tax liability” (Copthorne, at para. 65).[6]


The Supreme Court’s decision in Alta Energy confirms taxpayers are permitted to arrange their affairs in a tax efficient manner so long as they comply with both the text and the object, spirit, and purpose of the Act and treaties. In this case, the plain text of the relevant provisions of the Treaty expressed the spirit, object, and purpose of the provisions. The SCC was not able to adduce a different purpose beyond the clear purpose expressed by the text of the Treaty.



[1] Referring to the decisions of the Tax Court of Canada and the Federal Court of Appeal. See Alta Energy Luxembourg S.A.R.L v R, 2018 TCC 152 and Canada v Alta Energy Luxembourg S.A.R.L., 2020 FCA 43, respectively.

[2] Canada, Department of Finance, “Notice of Ways and Means Motion to Introduce an Act to Implement a Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion And Profit Shifting” (May 2018), online: Department of Finance: <>.

[3]Canada v Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 (“Alta Energy”).

[4]Alta Energy at para 6.

[5]Alta Energy at para 89.

[6]Alta Energy at para 96.

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