Tax Treaty Case Law around the Globe 2019

S. 2601. Introduction

Like the OECD Model, all of Canada’s tax treaties contain a “Substituted Property Rule” extending source jurisdiction to capital gains from the disposition of shares or other interests that derive their value principally from immovable property situated in a state. Unlike the OECD Model, however, many of Canada’s tax treaties exclude from this provision shares that do not form a “substantial interest” in a company (the “Substantial Interest Exception”) and/or define immovable property for the purpose of the provision to exclude “property (other than rental property) in which the business of [a] company … was carried on” (the “Excluded Property Exception”). Both exclusions exist in the Canada-Luxembourg Income and Capital Tax Treaty (the Canada-Luxembourg Tax Treaty), which for this and domestic tax reasons in Luxembourg is often used to structure or restructure investments into Canada.

In MIL Investments Ltd. v. The Queen, the Canada Revenue Agency (“CRA”) relied on Canada’s domestic general anti-avoidance rule (GAAR) to challenge a series of transactions entered into in order to benefit from the Substantial Interest Exception. In Alta Energy Luxembourg S.A.R.L v. The...