Tax Treaty Case Law around the Globe 2022

36.1. Introduction

Alta Energy is a textbook example of tax treaty shopping, involving a taxpayer that was established in Luxembourg to restructure an investment in Canadian oil and gas properties in order to obtain the benefit of an exception to source taxation of capital gains from the alienation of shares in the Canada-Luxembourg Income and Capital Tax Treaty (1999) (“the Treaty”).

At the Tax Court of Canada, the Court rejected the Crown’s primary argument that the shares did not qualify for the exception, as well as its alternative argument that the treaty benefit should be denied under Canada’s general anti-avoidance rule (GAAR). At the Federal Court of Appeal, the Court dismissed the Crown’s appeal, which relied exclusively on the GAAR. In a 6-3 decision, a majority of the Supreme Court of Canada upheld the Federal Court of Appeal decision, concluding that the GAAR did not apply.

Although the majority’s interpretive approach to the GAAR is deeply flawed, its conclusion that the GAAR does not apply to the transactions is justified on the grounds that an underlying policy against the use of conduit companies for tax treaty shopping purposes was not clear when the S. 436transaction...