Two recent Tax Court of Canada (the “TCC”) decisions involving the application of the general anti-avoidance rule (“GAAR”) have proven to be taxpayer victories. In Alta Energy Luxembourg S.A.R.L. v The Queen (2018 TCC 152) (“Alta Energy”), the TCC allowed a holding company resident in Luxembourg the benefit of the Canada-Luxembourg Income Tax Convention 1999 (the “Treaty”), which allowed the taxpayer, which was not subject to tax in Luxembourg on the relevant disposition, to also avoid Canadian taxation on the disposition (in essence, resulting in double non-taxation).
The original structure involved non-resident investors holding shares of Alta Energy Partners LLC (“Alta US LLC”) who, in turn, owned shares of Alta Energy Partners Ltd. (“Alta Canada”), which carried on business in Canada. Alta Canada’s shares derived their value principally from Alta Canada’s ‘working interest’ in land and, as such, the shares constituted “taxable Canadian property” within the meaning of subsection 248(1) of the Income Tax Act (Canada) (the “Act”). It was quickly realized that holding Alta Canada shares through Alta US LLC was a mistake and the fair market value of Alta Canada shares had not yet increased, so the investors restructured their holdings such that the Alta Canada shares were transferred to Alta Energy. At a later date, Alta Energy disposed of the shares of Alta Canada for a gain and relied on Article 13 of the Treaty to exempt the gain from tax in Canada.
The Minister argued that the exemption available under Article 13 should not apply and, even if it did apply, that the GAAR (in subsection 245(2) of the Act) should apply to deny the taxpayer the benefit of the non-taxation of the gain because the restructuring amounted to “treaty shopping”, and was an abuse of the Treaty. The TCC disagreed with the Minister on both counts, and held in favour of the taxpayer.
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