Canada v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 432021 SCC 49 (39113)

“In 2011, two American firms founded an American company for the purpose of acquiring and developing unconventional oil and natural gas properties. Alta Energy Partners Canada Ltd. (“Alta Canada”), a wholly owned Canadian subsidiary of that company, was incorporated in order to carry on that business. A restructuring of Alta Canada was undertaken in 2012. As part of the restructuring, Alta Energy Luxembourg S.A.R.L. (“Alta Luxembourg”) was incorporated under the laws of Luxembourg and its shares were issued to a new Canadian partnership. On the same day, Alta Luxembourg purchased all of the shares of Alta Canada. In 2013, it sold those shares, realizing a capital gain in excess of $380 million. Payment for the shares was organized so that Alta Luxembourg did not receive any of the sale proceeds. Following the sale, Alta Luxembourg did not conduct any other business or hold any other investments.

The capital gain was reported to the Luxembourg tax authorities and was subject to full taxation under Luxembourg’s domestic laws. In its Canadian tax return for 2013, Alta Luxembourg claimed an exemption from Canadian tax on the basis that the gain was not included in its “taxable income earned in Canada” under s. 115(1)(b) of the Income Tax Act (“Act”) because the shares were “treaty‑protected property” under art. 13(4) and (5) of the Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (“Treaty”). Article 13(4) of the Treaty creates an exemption for residents of Luxembourg from Canadian tax arising from a capital gain on the alienation of shares the value of which is derived principally from immovable property situated in Canada and in which the business of the company was carried on.

The Minister denied the treaty exemption. Alta Luxembourg appealed to the Tax Court of Canada. The Minister argued that the business property exemption in art. 13(4) of the Treaty did not apply and, in the alternative, if the shares did qualify as treaty‑protected property, that the general anti‑avoidance rule (“GAAR”) in s. 245 of the Act should apply. The Tax Court found that the shares were treaty‑protected property. With respect to the GAAR, the parties agreed that the restructuring was an “avoidance transaction” as defined in s. 245(3) of the Act that resulted in a tax benefit. The Tax Court held that the avoidance transaction did not result in a misuse or abuse of the provisions of the Act or the Treaty. The Federal Court of Appeal dismissed the Minister’s appeal, which raised only the issue of whether the GAAR applied.”

The SCC (6:3) dismissed the appeal.

Justice Côté wrote as follows (at paras. 1-7, 9-10, 32-33, 47-49, 67, 89, 96):

“The principles of predictability, certainty, and fairness and respect for the right of taxpayers to legitimate tax minimization are the bedrock of tax law. In the context of international tax treaties, respect for negotiated bargains between contracting states is fundamental to ensure tax certainty and predictability and to uphold the principle of pacta sunt servanda, pursuant to which parties to a treaty must keep their sides of the bargain.

Section 245 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (“Act”), known as the general anti-avoidance rule (“GAAR”), acts as a legislative limit on tax certainty by barring abusive tax avoidance transactions, including those in which taxpayers seek to obtain treaty benefits that were never intended by the contracting states. This intention is found by going behind the text of the provisions under which a tax benefit is claimed in order to determine their object, spirit, and purpose. In the bilateral treaty context, there are two sovereign states whose intentions are relevant; a robust analysis must take both into consideration in order to give proper effect to the tax treaty as a carefully negotiated instrument.

In this case, the appellant, Her Majesty The Queen, as represented by the Minister of National Revenue (“Minister”), submits that the transaction at issue abused the Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, Can. T.S. 2000 No. 22 (“Treaty”). According to the Minister, the drafters did not intend the Treaty to benefit residents without “sufficient substantive economic connections” to their state of residence (A.F., at para. 100). In the view of the respondent, Alta Energy Luxembourg S.A.R.L. (“Alta Luxembourg”), the Minister has failed to discharge her burden of establishing that the object, spirit, or purpose of the provisions was frustrated or defeated.

In my view, the Minister is asking this Court to use the GAAR to change the result, not by interpreting the provisions of the Treaty through a unified textual, contextual, and purposive analysis, but by fundamentally altering the criteria under which a person is entitled to the benefits of the Treaty, thus frustrating the certainty and predictability sought by the drafters.

Tax treaties are replete with choices. One key choice made by Canada and Luxembourg was to deviate from the Organisation for Economic Co‑operation and Development (“OECD”) Model Tax Convention on Income and on Capital (“OECD Model Treaty”) by including a specific carve-out provision for immovable property, also called the business property exemption. This carve-out allocates to a person’s residence state the right to tax capital gains realized on the disposition of shares or other similar interests deriving their value principally from immovable property used in a corporation’s business. The rationale of the carve-out is not connected to the theory of economic allegiance. In fact, this provision is a clear departure from this theory, for the source state normally has the greater economic claim to tax income derived from immovable property or a business situated within its territory.

Canada’s decision to forego its right to tax such capital gains realized in Canada was based on economic considerations broader than generating tax revenues. Tax law is designed not only to bring revenues into a state’s coffers but also to incentivize or disincentivize certain behaviours (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 53). Indeed, in agreeing to include the carve-out in the Treaty, Canada sought to encourage investments by Luxembourg residents in business assets embodied in immovable property located in Canada (e.g. mines, hotels, or oil shales) and to reap the ensuing economic benefits. This incentive was never intended to be limited to Luxembourg residents with “sufficient substantive economic connections” to Luxembourg. Internationally, residency typically does not depend on the existence of such connections; formal criteria for residency are just as well accepted as factual criteria.

In this case, Alta Luxembourg made exactly such an investment. It is a resident of Luxembourg and, as such, is exempt from Canadian taxes on the capital gain realized on the disposition of shares of its wholly owned Canadian subsidiary.


In raising the GAAR, Canada is now seeking to revisit its bargain in order to secure both foreign investments and tax revenues. But if the GAAR is to remain a robust tool, it cannot be used to judicially amend or renegotiate a treaty.

…I agree with the courts below that the Minister has not discharged her burden of proving abusive tax avoidance. 


The onus rests on the Minister to demonstrate the object, spirit, and purpose of the relevant provisions and to establish that allowing Alta Luxembourg the benefit of the exemption would be a misuse or an abuse of the provisions (Canada Trustco, at para. 65). Abusive tax avoidance occurs “when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent” or when a transaction “defeats the underlying rationale of the provisions that are relied upon” (Canada Trustco, at paras. 45; see also para. 57; Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3, at para. 40). Abusive tax avoidance can also occur when an arrangement “circumvents the application of certain provisions, such as specific anti‑avoidance rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions” (para. 45).

Canada Trustco recognized that the line between legitimate tax minimization and abusive tax avoidance is “far from bright” (para. 16). As a result, “[i]f the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer” (Canada Trustco, at para. 66; see also Copthorne, at para. 72).

First and foremost, tax avoidance is not tax evasion, and there is no suggestion by either party that the transaction in this case was evasive. In addition, tax avoidance should not be conflated with abuse. Even if a transaction was designed for a tax avoidance purpose and not for a bona fide non-tax purpose, such as an economic or commercial purpose, it does not mean that it is necessarily abusive within the meaning of the GAAR (Canada Trustco, at paras. 36 and 57; see also Lipson, at para. 38). The purpose of a transaction is relevant mainly to characterize it as either an avoidance transaction or a bona fide transaction and, specifically, to assess the abusive nature of the transaction. In their factual analysis, courts may consider whether an avoidance transaction was “motivated by any economic, commercial, family or other non-tax purpose” (Canada Trustco, at para. 58). However, a finding that a bona fide non-tax purpose is lacking, taken alone, should not be considered conclusive evidence of abusive tax avoidance. Justices Rowe and Martin are taking exactly that approach, and it colours their entire analysis. Moreover, such a finding should not be allowed to impair the proper interpretation of the relevant provisions in a manner that makes substantive economic connections or the presence of a bona fide non-tax purpose a condition precedent to every tax benefit; the goal is to ensure the relevant provisions are properly interpreted in light of their context and purpose (Canada Trustco, at para. 62).

Second, it is also important to distinguish what is immoral from what is abusive. It is true, as reiterated in Copthorne, that the GAAR is a legislative measure by which “Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer” (para. 66). But, in Copthorne, Rothstein J. was quick to note the limits to that legislative mandate. In contrast to what my colleagues are proposing, Rothstein J. observed that courts should not infuse the abuse analysis with “a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do” (para. 70). Taxpayers are allowed to minimize their tax liability to the full extent of the law and to engage in “creative” tax avoidance planning, insofar as it is not abusive within the meaning of the GAAR (para. 65). Therefore, even though one may consider treaty shopping in tax havens to be immoral, this is not determinative of a finding of abuse.

Finally, the abuse analysis is not meant to be a “search for an overriding policy of the Act that is not based on a unified, textual, contextual and purposive interpretation of the specific provisions in issue” (Canada Trustco, at para. 41). The focus of the interpretation is on the object, spirit, and purpose of the specific provisions and not on the broader policy objective of the Act or of a particular tax treaty. Therefore, policy objectives such as “avoiding double taxation” and “encouraging trade and investment” that are found in bilateral tax treaties cannot be invoked to override the wording of the provisions in issue.

In sum, the object, spirit, and purpose of arts. 1 and 4(1) are to allow all persons who are residents under the laws of one or both of the contracting states to claim benefits under the Treaty so long as their resident status could expose them to full tax liability (regardless of whether there is actual taxation). They are broadly consistent with international norms. This is normally the case for corporations that are residents by virtue of the “place of incorporation” or “legal seat” rule, unless they fall within the exclusion provided for in art. 28(3). As a result, I conclude that the spirit of these provisions is not to reserve the benefits of the Treaty to residents that have “sufficient substantive economic connections” to their country of residence.

In conclusion, the object, spirit, and purpose of the carve-out provided for in art. 13(4) and (5) of the Treaty are to foster international investment by exempting residents of a contracting state from taxes in the source state on capital gains realized on the disposition of immovable property in which a business was carried on, or on the disposition of shares whose value is derived principally from such immovable property. The fact that the capital gains may not be taxed in Luxembourg, leading to double non‑taxation, and the fact that conduit corporations can take advantage of the carve-out are tax planning outcomes consistent with the bargain struck between Canada and Luxembourg. Although Canada had a greater claim to tax such income based on the theory of economic allegiance and would have most likely received more tax revenues without the carve-out given its traditional status as a source state, Canada agreed to forego its right to tax such capital gains, regardless of whether they would be taxed in Luxembourg, in order to attract foreign investment in business assets embodied in immovable property located in Canada (e.g. hotels, mines, or oil shales) and to reap the economic benefits generated by that investment. This is what was actually agreed upon. It appears that Canada was aware of tax planning strategies using conduit corporations in Luxembourg but that it made a deliberate choice not to include anti-avoidance provisions that would have addressed this situation in the Treaty.

A final note on the Minister’s implication that treaty shopping arrangements are inherently abusive. A broad assertion of “treaty shopping” does not conform to a proper GAAR analysis. In accordance with the separation of powers, developing tax policy is the task of the executive and legislative branches. Courts do not have the constitutional legitimacy and resources to be tax policy makers (Canada Trustco, at para. 41). It is for the executive and legislative branches to decide what is right and what is wrong, and then to translate these decisions into legislation that courts can apply. It bears repeating that the application of the GAAR must not be premised on “a value judgment of what is right or wrong [or] theories about what tax law ought to be or ought to do” (Copthorne, at para. 70). Taxpayers are “entitled to select courses of action or enter into transactions that will minimize their tax liability” (Copthorne, at para. 65). The courts’ role is limited to determining whether a transaction abuses the object, spirit, and purpose of the specific provisions relied on by the taxpayer. It is not to rewrite tax statutes and tax treaties to prevent treaty shopping when these instruments do not clearly do so.”