On August 6, 2020, the Supreme Court of Canada (“SCC”) granted leave to hear the case between the Crown and Alta Energy Luxembourg (“Alta Luxembourg”). The Federal Court of Appeal (“FCA”) had released its decision in The Queen v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 43 (“Alta Energy FCA”) earlier this year on February 12, 2020.
In this blog post, I provide a summary on the issues in Alta Energy FCA and how the case impacted Canada’s General Anti-Avoidance Rules (“GAAR”) and the notion of “treaty shopping”.
Review of Alta Energy FCA
In 2011, Alta Resources LLC and Blackstone Group LP incorporated Alta Energy Canada (“Alta Canada”) through an American LLC subsidiary. Alta Canada carried on in shale oil businesses in Alberta, Canada. This arrangement was restructured in 2012, and the ownership of Alta Canada was transferred to the newly formed Alta Luxembourg. The American LLC held Alta Luxembourg through an Alberta partnership. In 2013, Alta Luxembourg sold its shares of Alta Canada with a large capital gain. At issue is whether this capital gain is subject to Canadian tax.
Article 13(4)(a) of the Canada-Luxembourg Income Tax Convention (“Can-Lux Treaty”) allows Canada to tax Luxembourg residents on the disposition of shares if shares derive their value from immovable property in Canada. However, Canada forfeits the right to tax Luxembourg residents on the disposition of shares which derive its value from certain Canadian properties on which business is carried on.
In Alta Energy FCA, Alta Luxembourg claimed that Alta Canada derived its value from Canadian property in which business was carried on — in such a way that it was exempt from Canadian tax. However, the Crown claimed that this was an abuse of the Can-Lux Treaty and that the GAAR disallowed the treaty exemption to leave a Luxembourg resident free of Canadian tax liability.
GAAR applies where a taxpayer abuses a particular provision to obtain a tax benefit. To successfully make a case against Alta Luxembourg, the Crown had to identify the rationale of the relevant provisions and how Alta Luxembourg’s transaction abused that rationale. The FCA ultimately rejected the Crown’s argument because the Crown had not identified a clear rationale for the apparently abused provisions noting the Tax Court’s distinction between merely selecting a treaty versus using a treaty in an allegedly abusive manner.
In rejecting the Crown’s arguments, quoting the Tax Court of Canada’s reasons, the FCA also confirmed that the selection of a particular jurisdiction to benefit from its tax treaty with another jurisdiction, which the Crown considered to be abusive “treaty shopping” is not inherently abusive towards Canadian tax law. In part, as referenced by the FCA in paragraph 78 of their reasons, the Tax Court of Canada said:
"I do not agree that Justice Iaccobucci's obiter dicta [in the Supreme Court’s decision of the Crown Forest case: Crown Forest Industries Limited v. The Queen, [1995] 2 S.C.R. 802 ] can be used to establish a prima facie finding of abuse arising from the choice of the most beneficial treaty. There is nothing inherently proper or improper with selecting one foreign regime over another. Respondent's counsel was correct in arguing that the selection of a low tax jurisdiction may speak persuasively as evidence of a tax purpose for an alleged avoidance transaction, but the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive. It is the use of the selected treaty that must be examined."
A question left unanswered, of course, by the FCA’s decision is how the OECD’s Multilateral Instrument (“MLI”), which Canada ratified and which according to its terms came into force for Canada in December 2019, could affect arrangements that might be described as “treaty shopping”. The MLI, which includes a “principal purpose test” as a treaty limitation, applies to many Canadian treaties. This case does not consider the MLI or the lead up to it as the Crown and Alta Luxembourg brought their issues to the Tax Court of Canada in 2018 for an earlier taxation year. However, FCA did notice that there have been intervening developments in their decision that the SCC will now consider. The FCA said, in paragraph 77 of their reasons:
"The Tax Court Judge also referred to the steps that the Department of Finance indicated that it would be taking to curb treaty shopping. However, there were no steps that were taken prior to the transactions in this case. Any actual steps that were taken after the transactions in this case were completed, or that may possibly be taken in the future, are not applicable in this case but may have an impact on future transactions."
It is not inconceivable that what the SCC may say about the significance of tax treaties and the influence of domestic anti-avoidance legislation in applying them prospectively, in deciding Alta Energy, would affect perceptions in the tax community generally of what is thought to be and casually described as “treaty shopping."