Luxembourg: Alta Energy Luxembourg - Tax Court (Again) Affirms Taxpayer's Right To Access Treaty Benefits

  • The Tax Court of Canada has decided in Alta Energy Luxembourg S.A.R.L. v. Her Majesty the Queen that a Luxembourg resident corporation may avail itself of the benefits of the Canada-Luxembourg Income Tax Convention without being subject, for that reason alone, to the general anti-avoidance rule ("GAAR") under Canada's Income Tax Act ("ITA").
  • In its August 22, 2018 decision, the Court confirmed that a GAAR analysis should not be about labels such as (so-called) "treaty shopping", but rather must be grounded in the text of the applicable statute or treaty.
  • The case also contains an interesting analysis of how the immovable property exception in the Canada-Luxembourg convention functions in the context of the resource sector.
  • While the result was favourable for the taxpayer, the fact that the Crown chose (again) to challenge on the basis of GAAR (in the treaty context) is both noteworthy and troubling.

BACKGROUND

The following are some of the key facts in the case:

  • Alta Energy Partners Canada Ltd. ("Alta Canada") was a wholly-owned subsidiary of Alta Energy Partners, LLC of Delaware.
  • Alta Canada's shares constituted "taxable Canadian property" for ITA purposes because the company was in the business of acquiring and developing Canadian resource properties.
  • In a 2012 restructuring, the shares of Alta Canada were transferred to a related newly-formed Luxembourg company (the "Appellant").
  • In 2013, the Appellant sold its shares of Alta Canada to an arm's length third party for approximately $680 million.
  • At the time of the sale, Alta Canada owned licenses to explore, drill and extract hydrocarbons over 62,000 acres in Alberta's Duvernay Formation ("Working Interest"). It had also drilled six wells and participated in two other wells as a non-operator.

TAXPAYER’S FILING AND MINISTER’S REASSESSMENT

The Appellant filed its Canadian tax returns on the basis that the approximately $380 million capital gain it had realized on the share sale was exempt from tax under the Canada-Luxembourg Income Tax Convention 1999 (the "Treaty"). While Articles 13(4) and (5) of the Treaty establish that Canada retains the right to tax a capital gain arising from the disposition of shares that derive their value principally from immovable property located in Canada, there is an exception (the "Immovable Property Exception") for immovable property in which the company carries on business. Note that there is no comparable exception in the Canada-US tax treaty.

The Minister of National Revenue (the "Minister") reassessed the Appellant's return, denying its claim that the share sale was exempt from Canadian tax. The Minister advanced two arguments for its conclusion that the Immovable Property Exception did not apply to the Working Interest:

  • Alta Canada drilled in and extracted hydrocarbons from only a small number of sections in the property which it controlled ("sections" being the term for areas within a property with respect to which licenses are issued); and
  • The application of the Immovable Property Exception in this case is subject to the GAAR on the basis that the Appellant's use of the Treaty amounts to abusive "treaty shopping".

ISSUES ON APPEAL

On this appeal of the Minister's decision, the Tax Court was asked to decide on the following points:

  • Is the capital gain realized by the Appellant as a result of the Alta Canada share sale exempt from tax under Articles 13(4) and (5) of the Treaty?
  • If so, does the GAAR override the Treaty on the basis of so-called abusive "treaty shopping"?

DECISION: TREATY EXEMPTION APPLIES BUT GAAR DOESN’T

The Immovable Property Exception in the natural resource context

While it is not our focus in this post, the decision includes valuable analysis of how the Immovable Property Exception applies in the context of the resource sector. In this case, not all of the lands were under active exploitation at the time of the sale. The Crown's position was that the exception should apply strictly on a license-by-license basis and that only the lands covered by a license on which there was active drilling or extraction should be covered.

Rejecting this approach, Justice Hogan of the Tax Court noted that the Crown's position did not reflect the commercial realities of how the resource industry operates. In the case of the oil industry, it ignored the fact that oil extracted through a vertical well on one section will in many cases come from a pool that underlies many sections. While this case dealt with the oil and gas sector, Justice Hogan extended his analysis to forestry operations, in which best environmental practices require that some sections of a timber property remain untouched. In Justice Hogan's view, to limit the Immovable Property Exception to sections of a timber property that are currently being exploited would incentivize clear-cutting at the expense of sustainable development.

Accordingly, after reviewing the purposes of Article 13 and the Immovable Property Exception, Justice Hogan concluded that the Treaty drafters would have intended for a resource company to qualify for the Immovable Property Exception when such property is developed in accordance with the industry's best practices, as was the case here.

Application of GAAR

In the alternative, the Crown advanced the argument that the GAAR should apply to override the Treaty result. In many respects, this argument was a reprise of the 2007 Federal Court of Appeal decision in Canada v. MIL (Investments) S.A., which is surprising given that, as discussed below, MIL and a number of cases that followed it are generally believed to have cemented the proposition that a vague general policy against "treaty shopping" cannot support a GAAR-based finding of abuse of the Treaty.

Case law on treaty shopping

MIL involved a taxpayer changing its domicile from the Cayman Islands to Luxembourg prior to selling shares in a Canadian company, apparently for the purpose of taking advantage of the capital gains exemption set out in the Treaty. In rejecting the Crown's position that "treaty shopping", as such, represented an abuse of the provisions of the Treaty that exempted the capital gain from tax in Canada, Pelletier J.A. wrote:

[W]e are unable to see in the specific provisions of the [ITA] and the Tax Treaty to which we were referred, interpreted purposively and contextually, any support for the argument that the tax benefit obtained by the respondent was an abuse or misuse of the object and purpose of any of those dispositions.

MIL clearly stands for the proposition that in isolation so-called treaty shopping is not abusive under GAAR. Similar statements were made in Garron Family Trust (Trustee of) v. The Queen. and Antle v. The Queen, each of which involved the shifting of a capital gain to a Barbados trust followed by the claim of a treaty exemption under the Canada-Barbados treaty. For example, Sharlow J.A. for the Federal Court of Appeal in Garron stated:

The fact that the Trusts would also be entitled to a treaty exemption flows from the fact that in the Barbados Tax Treaty, Canada has agreed not to tax certain capital gains realized by a person who is a resident of Barbados. If the residence of the Trusts is Barbados for treaty purposes, the Trusts cannot misuse or abuse the Barbados Tax Treaty by claiming the exemption.

These decisions strongly support the position that the use of a treaty is not abusive simply because there is no tax in Canada or elsewhere.

In response to the above case law, Canada's Department of Finance ("Finance") announced a treaty shopping consultation process in the 2013 federal budget, which was followed by a consultation paper. In this consultation paper, Finance recognized the judicial precedent related to treaty shopping stating:

As discussed in more detail below, Canadian courts have generally accepted that treaty shopping occurred in the cases before them, but did not find a clear tax treaty policy or legislative intent to deny the application of a tax treaty benefit to any particular treaty shopping arrangement.

...

Collectively, these three cases indicate in relatively strong terms that the courts in Canada are not currently inclined to find against taxpayers in treaty shopping cases. In other words, the courts in Canada require clearer legislative direction to the effect that treaty shopping is an improper use of Canada's tax treaties. [emphasis added]

Finance ultimately decided not to proceed with a proposed domestic treaty shopping rule, which was the outcome of the consultation paper. However, it did later become a signatory to the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI"). Once effective, the MLI will introduce a new anti-treaty shopping rule into many of Canada's tax treaties and will likely be the mechanism by which the Government challenges treaty shopping arrangements that it doesn't like.

The contrast between the Minister's GAAR argument in this case and the earlier statements by Finance was recognized by Justice Hogan:

It is apparent to me that the [Crown] seeks to achieve the same result in the instant case under the GAAR as that intended under the above captioned proposed rule. In my opinion, the [Crown] is seeking to apply the GAAR in order to deal with what Finance now believes is unintended gap in the Treaty.

Given all of this, Justice Hogan did not appear to have any difficulty in finding that the vague proposition of "treaty shopping" could not constitute abuse under the Treaty, in the absence of identifying abuse of specific articles in the Treaty. As further support, Justice Hogan noted that the OECD Model Treaty does not contain an Immovable Property Exception and that it must be presumed that Canada had a valid reason to allow Luxembourg to retain the right to tax capital gains in those specific circumstances. As he concluded, "It is certainly not the role of the court to disturb their bargain in this regard."

CONCLUSION

The Minister of National Revenue clearly did not like the tax result that was achieved as a consequence of the Appellant's reorganization. However, this alone is not sufficient to support the application of the GAAR. As the Supreme Court of Canada has stated, a GAAR analysis "should not be conflated with a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do". Given the existing case law on the topic, the apparent contradiction with Finance's own statements and the impact of the MLI going forward, the position taken by the Minister in this case might best be described as "puzzling".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions