Treaty-shopping is not Inherently Abusive Tax Avoidance in Canada v Alta Energy Luxembourg S.A.R.L.

In Canada v Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 [Alta Energy], the Supreme Court of Canada (“SCC”) unanimously held that taxpayers are entitled to arrange their affairs under international tax treaties to minimize their  liability. These arrangements – also referred to as ‘treaty-shopping’ –  will not necessarily be considered abusive unless the absence of an economic connection is clearly contrary to the object, spirit and purpose of the provision conferring a benefit. The SCC split on whether this was the case for Alta Energy Luxembourg S.A.R.L., with the majority deciding in the corporation’s favour.


The impact of the decision is likely to be limited by the recent passage of the  Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which you can read about here. Nevertheless, the divergent approaches taken by the majority and dissent with respect to treaty interpretation merit further examination. Much as the dissent’s apparent outrage regarding international tax avoidance is satisfying on one level, the palpable indignation somewhat clouds their analysis when it comes to probing the negotiating parties’ common intent. 



Canada and Luxembourg sign a tax treaty

In tax law, residency determines which jurisdiction can tax all of a person’s sources of income, worldwide. By contrast, a non-resident taxpayer is someone who is liable for tax in another jurisdiction for sources of income that originate in that jurisdiction. Under Canada’s Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], non-residents are taxed on Canadian sources of employment and business income, as well as capital gains realized on the disposition of Canadian property (ITA, s 2(3)). The capital gains tax is limited where the property is protected by an international tax treaty (ITA, 115(1)(b)).


On September 10, 1999, Canada and Luxembourg entered 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”). Article 13 of the Treaty provides that resident taxpayers will be taxed by the source country (i.e., the non-resident state) for capital gains realized on the sale of shares in immovable property located in the source country. Paragraphs 13(4) and (5) create an exemption to this rule where the shares derive their principal value from a business conducted in the immovable property, such as a mine, hotel, or oil development project (Alta Energy, para 68). For ease of reference, these paragraphs in the Treaty will be referred to as the “business property exemption.”


Alta Luxembourg is incorporated to dispose of shares in an Alberta oilsands project

In 2012, Alta Energy Partners, LLC (“Alta Energy”), an American firm, incorporated Alta Energy Luxembourg S.A.R.L. (“Alta Luxembourg”) under the laws of Luxembourg. Alta Energy had been advised that any future disposition of its shares in the oilsands business of its wholly owned Canadian subsidiary, Alta Energy Partners Canada Ltd. (“Alta Canada”), would be subject to a capital gains tax in Canada (Alta Energy, para 11). Subsequently, Alta Energy sold all of its shares in Alta Canada to Alta Luxembourg, which then sold the shares to Chevron Canada Ltd. (“Chevron”) (Alta Energy, para 12). Alta Luxembourg realized a capital gain of more than $380 million through this series of transactions, reporting this income to the Luxembourg tax authorities. After issuing the proceeds from the sale to the Alta Energy Canada Partnership, it ceased to hold any investments or conduct any further business in Luxembourg (Alta Energy, para 13). 


Alta Luxembourg claimed in its tax filings with Canada that it did not owe capital gains tax on the transaction with Chevron because of the business property exemption under the Treaty. The Minister of National Revenue (“Minister”) denied the exemption.


The lower courts rule against the Minister

The Minister argued before the Tax Court of Canada (“TCC”) that the transaction in question was contrary to the General Anti-Avoidance Rule (“GAAR”) under section 245 of the ITA. The GAAR prohibits abusive tax avoidance transactions, where abuse is interpreted as frustrating or defeating the object, spirit and purpose of the statutory or treaty provision(s) conferring the benefit (Alta Energy, para 2). In this case, the provision in question was the business property exemption under Article 13 of the Treaty. The TCC held that while the sale of shares was an avoidance transaction, it was not abusive. Rather, the transaction complied with the underlying rationale of the business property exemption, which was to attract foreign investment (Alta Energy, para 21). 


The Federal Court of Appeal unanimously upheld the TCC decision (Alta Energy, paras 24-26).


SCC Decision

The GAAR applies where 1) there is a tax benefit arising from 2) an avoidance transaction that 3) is abusive (Alta Energy, para 31). The parties accepted that Alta Luxembourg was a resident of Luxembourg at the time the transaction took place and that the purpose of the transaction was to obtain the benefit of the business property exemption. This satisfied the first two stages of the GAAR analysis. The only contentious issue on appeal was whether the avoidance transaction was abusive (Alta Energy, paras 28, 31). 


The third prong of the GAAR analysis is carried out in two steps:  First, by identifying the object, spirit and purpose of the treaty provision relied upon, and second, by determining whether the transaction frustrated this underlying rationale. The majority and dissent diverged on both points (Alta Energy, para 31).



A 6-3 majority of the SCC held that the Minister did not meet her burden of proving that the avoidance transaction was abusive. For one, they rejected the Minister’s submission that the object, spirit and purpose of the business property exemption is to allocate taxation rights under the treaty based on the country with the stronger economic connection to the taxpayer’s income (Alta Energy, paras 70-71). Instead, the majority understands the underlying rationale to be incentivizing foreign investment in Canadian business assets in immovable property by offering a tax break to residents of Luxembourg (Alta Energy, para 77). 


Writing for the majority, Justice Côté provides interpretive guidance for conducting a GAAR analysis. First, she cautions that while the GAAR by its nature requires going beyond the text of a provision to identify its object, spirit and purpose, this inquiry is not to be guided by moral claims about what tax law should and should not tax (Alta Energy, para 48). Given the Duke of Westminster principle (“taxpayers are entitled to arrange their affairs to minimize the amount of tax payable”), tax avoidance is neither tax evasion nor abuse as such. Unless a transaction is clearly abusive (i.e., clearly frustrates the underlying rationale of the specific provision at issue), courts must resolve doubts in favour of the taxpayer (Alta Energy, paras 33, 47-48).


Further, where a GAAR analysis involves a treaty benefit, Justice Côté instructs that courts must identify the bargain reached by the parties and whether the tax avoidance transaction falls within the ambit of their common intention (Alta Energy, para 36). Soft law like the OECD Model Treaty and accompanying Commentaries may be relevant to this analysis, provided that the ideas they contain, expand upon or clarify could have been considered by the contracting states at the time of negotiating the agreement (Alta Energy, paras 40-42). Further, the absence of a non-avoidance purpose, or the presence of an economic one, is abusive only if it is contrary to the underlying rationale of the specific treaty provision (Alta Energy, para 47). Justice Côté is emphatic that it is the specific provision that matters, not the broader policy objectives of the treaty as a whole, or of the ITA, as the case may be (Alta Energy, para 49).


Applying these principles, the majority dismissed the Minister’s argument that beneficiaries of the business property exemption must have a genuine economic presence in the country of residence to claim the exemption. Here the Minister relied on the theory of economic allegiance, wherein a country’s right to tax an individual is justified by the taxpayer’s economic connections to the state (Alta Energy, para 69). From these facts, it would follow that Canada, as the source country, has the superior claim to tax immovable property because of its physical attachment to the country. But, the Minister argued, this claim could be overcome if the taxpayer maintained “sufficient substantive economic connections” with the country of residence, and in this case, Alta Luxembourg lacked those connections (Alta Energy, paras 70-71). 


The majority was not convinced. They concluded that incentivizing foreign investment, not economic allegiance,  was the motivating principle behind the exemption. Justice Côté explains that Canada needed to make choices to balance competing policy considerations. It gave up its interest in collecting more tax revenue in order to remain competitive in a global economy. Higher source taxes disincentivize foreign investment while tax breaks incentivize it (Alta Energy, para 77). 


Further, Justice Côté finds that Canada agreed to the carve-out at a time when it was well known that third-parties were using conduit companies to claim treaty benefits they could not claim directly in their own jurisdiction. Canada also would have been aware of Luxembourg’s popularity as a low-tax haven. Nevertheless, and despite the OECD’s recommendations to contracting states on this very matter, despite including protections for itself in other treaties entered around this time, Canada did not negotiate any safeguards for itself under Article 13 (Alta Energy, paras 80-81, 83-86). All this suggests that Canada deliberately chose not to exclude third parties from indirectly benefiting from the business property exemption. As such, Alta Luxembourg did not frustrate this choice when it sold the shares to Chevron, and the GAAR did not apply as a result (Alta Energy, para 94).



Where the majority emphasizes predictability, certainty and respect for the bargain struck between the parties, the dissent stresses fairness (Alta Energy, paras 1, 5-6). Justices Martin and Rowe strike a completely different tone in their joint opinion, leading off by highlighting  the hundreds of billions of dollars that governments lose every year as a result of “aggressive international tax avoidance” (Alta Energy, para 98). They stress that the interests of certainty embodied by the Duke of Westminster principle are superseded by the GAAR and the interests of fairness that it represents. As the dissent repeatedly points out, in practice it is only those who can afford tax advisors who are able to minimize their tax liability to the fullest (Alta Energy, para 111). This increases the burden on everyone else to pay for the public services from which we all benefit.


With these preliminary considerations, the dissent goes on to accept the Minister’s position in its entirety. The Justices agree that the underlying rationale of the business property exemption is economic allegiance and the allocation of taxation rights to the country with the stronger economic connection to the income (Alta Energy, paras 133-38). They reject the notion that Canada and Luxembourg anticipated third-party residents benefitting from the Treaty in the absence of a genuine business connection to the state (Alta Energy, para 105). They conclude that since Alta Luxembourg had virtually no presence the country of residence, the avoidance transaction the company carried out was in fact abusive.




It is laudable that the dissent focuses on Parliament’s intent behind legislating the GAAR, especially when one considers the outsized role the Duke of Westminster principle has played in tax cases. Even so, the dissent’s opinion often reads as though the Justices were evaluating the avoidance transaction in light of the purpose and objects of the anti-avoidance rule rather than the business property exemption. An avoidance transaction is abusive when it defeats or frustrates the underlying rationale of the benefit-conferring provision, not the GAAR. Relatedly, very little analysis is provided regarding the parties’ common intentions. I agree with the majority that when dealing with a treaty provision, the court must be mindful that it is the result of a negotiation. I think the dissent fails to respect the aspect of negotiation in part because of how far they push what they view to be a duty under the GAAR to look beyond the text when interpreting a provision.  


As Justice Côté notes, the interpretation of international treaties is governed by the Vienna Convention on the Law of Treaties, Can TS 1980 No 37 [Convention] (Alta Energy, para 37) . Article 31 of the Convention provides that, “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose” (emphasis added). But the text disappears from the dissent’s analysis almost entirely. The words cannot be brushed aside simply because the GAAR contemplates transactions that comply with the letter of law. Doing so effaces the meaning that words are intended to communicate when read harmoniously with the context and purpose of the provision. While this is the approach the SCC endorsed for interpreting the ITA, it is compatible with Article 31 of Convention, especially considering that the GAAR applies to both ITA and treaty provisions (Canada Trustco Mortgage Co v Canada, 2005 SCC 54, para 10). But more than that, the text is arguably more important in treaty interpretation because it is meant to represent the shared intention of two parties and the bargain they have struck. Diminishing the importance of the text also downplays the silences in the agreement. In the process, a court risks minimizing, misinterpreting or altogether ignoring the deliberate choices behind those silences, perhaps even to the point of filling that space with its own policy preferences. Given the separation of powers between the judiciary, the executive branch and the legislature, courts must be wary of crossing such a line.



Haritha Popuri

Haritha Popuri is a third-year student at Osgoode Hall Law School. She holds a B.A. in the History of Science and Technology from the University of King’s College, as well as an M.A. in Theatre & Performance Studies from York University. Prior to law school, she worked on federal policy and legislation as a parliamentary assistant in Ottawa. Her primary areas of interest are Aboriginal law, administrative law, and public interest litigation. After graduation, Haritha will be clerking at the Divisional Court in Ontario. In her spare time, you can find her pounding pavement, daydreaming about Montréal, or diligently failing to cook good South Indian food.

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