Alta Energy: The Supreme Court Of Canada Rules On Tax Treaty Shopping



On November 26, 2021, the Supreme Court of Canada (“SCC”) released its long-anticipated decision in The Queen v. Alta Energy Luxembourg S.A.R.L.1 . The majority of the Court dismissed the Crown’s appeal and confirmed that, where Canada has agreed in a double-tax treaty to cede taxing rights to another country, it cannot use the general anti-avoidance rule (“GAAR”)2 to renege on its agreement. In other words, a deal is a deal.


The case involved the 2013 sale (the “Sale”) by Alta Energy Luxembourg S.A.R.L. (“Alta Lux”) of shares (the “Shares”) of Alta Energy Partners Canada Ltd. (“Alta Canada”) to Chevron. Alta Canada was a corporation resident in Canada that operated a business of acquiring and developing oil and natural gas properties in Alberta. Alta Lux had been created and acquired the Shares solely for the purpose of the entering into the Sale and claiming a treaty exemption on the resulting gain. On the Sale, Alta Lux realized a gain in excess of $380 million. There was no question that the Shares constituted “taxable Canadian property”; absent an exemption under an applicable tax treaty, Alta Lux would have been subject to tax under the ITA on the taxable portion of its gain.3

The Treaty

Articles 13(4) and 13(5) of the Canada - Luxembourg 1999 Income and Capital Tax Convention4 (the “Treaty”) exempt from Canadian taxation gains realized on the disposition 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 “Business Property Exemption”). The sole question before the SCC was whether, taking GAAR into account, Alta Lux’s gain was sheltered by the Business Property Exemption, given the company’s lack of economic substance in Luxembourg.5

The CRA’s Concern

While the Canada Revenue Agency (the “CRA”) conceded that Alta Lux was a “resident” of Luxembourg taking into account only the literal wording of Article 4(1) of the Treaty, it argued that Alta Lux was not a “real” resident of Luxembourg and that, therefore, it was not entitled to the Business Property Exemption. In making that argument, the CRA attempted to invoke GAAR to override Articles 13(4) and 13(5). The CRA’s concern arose from two facts: (i) one year prior to the sale, Alta Energy Partners, LLC (“Alta LLC”) transferred the Shares to Alta Lux and (ii) Alta Lux did not have a substantial economic connection to Luxembourg (no large office, no employees, no active bank account, etc.).

Alta LLC’s transfer of the Shares to Alta Lux did not qualify for a treaty exemption and so was a taxable transaction for purposes of the ITA. However, because it was at a much lower price than the proceeds received a year later by Alta Lux on the Sale, a large portion of the overall gain realized from the time Alta Canada was created would be exempt from Canadian tax.


In undertaking any GAAR analysis, there is a three-part test6: (i) whether there was a “tax benefit”7 arising from a transaction, (ii) whether the transaction constituted an “avoidance transaction”8 and (iii) whether the avoidance transaction was abusive.

Before the SCC, Alta Lux conceded that Alta LLC’s transfer of the Shares to Alta Lux not only created a tax benefit for Alta Lux but was carried out primarily to confer that benefit, hence making it an “avoidance transaction”. Therefore, the sole issue before the SCC was whether the transfer constituted abusive tax avoidance.

The CRA argued that, as Alta Lux was merely a holding company with no employees, it was abusing both the Treaty’s residency rules and the Business Property Exemption. Accordingly, the CRA’s position was that Canada was not required to let Luxembourg have sole taxing rights in the respect of Alta Lux‘s gain on the sale of the Shares.

The Majority’s Decision

In a 6-3 decision, the majority of the SCC did not accept the CRA’s argument. Citing interpretive principles set out in the Vienna Convention on the Law of Treaties9, the majority confirmed that parties to a treaty must keep their sides of the bargain and perform their obligations in good faith (or as the old Latin expression goes, pacta sunt servanda: “every treaty in force is binding upon the parties to it and must be performed by them in good faith”). In the majority’s view, Canada entered into a binding agreement with Luxembourg knowing that the Grand Duchy did not tax capital gains, yetdid not insist on language that would have resulted in the gain from the sale of the Shares being taxable in Canada.

In undertaking the abuse analysis, the majority referred to some guiding principles. It distinguished between what is “immoral” on the one hand and “abusive” on the other and confirmed its previous ruling in Canada Trustco 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”. Furthermore, the majority reiterated that the abuse analysis is not meant to be a “search for an overriding policy of the [ITA] that is not based on a unified, textual, contextual and purposive interpretation of the specific provisions in issue” but rather the interpretation of the object, spirit, and purpose of the specific provisions of the ITA or of a particular tax treaty. The majority noted that GAAR cannot be used to replace or change clear wording in a tax or treaty provision based merely on the underlying purpose of that wording.

The majority then embarked on an analysis of the object, spirit and purpose of the residency requirements in Articles 1 and 4(1) of the Treaty. It concluded that the underlying rationale of Article 4(1) is 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 residency status could expose them to full tax liability (regardless of whether there is actual taxation). The majority noted that there is no reference to “sufficient substantive economic connection” in Articles 1 and 4 and that “the inclusion of an unexpressed condition must be approached with circumspection”.

Next, the majority analyzed the object, spirt and purpose of the Business Property Exemption and concluded that it was intended to foster international investment in business assets embodied in immoveable property, such as hotels and mines. By agreeing to the Business Property Exemption, Canada sought to increase employment and economic investment in Canada by providing an incentive to foreign investors. Had the drafters wished to put limits on this objective, there were safeguards that could have been included in the Treaty. For example, Canada could have insisted that the Business Property Exemption be applicable only if the relevant gain were taxable in Luxembourg (or only if the treaty resident had carried on the business for a minimum period of time, etc.).

Ultimately, the majority concluded that the provisions of the Treaty operated in the way the contracting states intended them to operate and, thus, the transfer of the Shares to Alta Lux and the subsequent Sale did not abuse those provisions.

Crucially, the majority held that, in a treaty context, the intentions of both countries must be taken into account in any GAAR analysis. Luxembourg had negotiated for the Business Property Exemption to benefit its residents. Using GAAR to override that exemption would be to displace unilaterally Luxembourg’s agreement and intentions.

The Dissenting Opinion

In contrast to the majority, the three dissenting justices focused on the fact that many countries had seen their tax base erode as a result of multinational corporations profiting from gaps and mismatches in international tax rules. Consequently, they viewed Alta Lux’s tax benefit under the Treaty as being the result of abusive avoidance transactions that frustrated the rationale underlying the Treaty’s relevant provisions. They did not believe that either the Tax Court of Canada or the Federal Court of Appeal (or the majority of the SCC) identified properly those provisions’ rationale.

Furthermore, they held that Parliament’s intention in enacting GAAR was to allow the courts the unusual duty to look beyond the words of a given provision and ascertain why it was adopted. Without such power, GAAR would be meaningless.

In the dissent’s view, the object, spirit and purpose of Articles 1, 4 and 13 of the Treaty were akin to the theory of economic allegiance. This theory assigns allocation of taxation powers to the state that has the closest taxation connection to the relevant income.

The dissent agreed that Article 13(4) allocates solely to Luxembourg the right to tax its residents’ indirect gains from immovable property situated in Canada that is used in a business, but noted that Alta Lux had no or few genuine economic connections with Luxembourg. The dissent held that this resulted in a breach of that Article’s rationale. The dissent concluded that, where taxing rights in a tax treaty are allocated on the basis of economic allegiance and conduit entities claim tax benefits despite the absence of any genuine economic connection with the state of residence, treaty shopping is abusive.

Impact of Decision Going Forward

The majority’s holding that GAAR cannot be used to replace the words of a provision is critical to our understanding GAAR. For example, in a recent decision the Federal Court of Appeal applied to GAAR to read the word “control” in subsection 11(1(5) as meaning “actual control” . The taxpayer in that case has applied for leave to appeal. The decision in Alta Energy should give it a much stronger basis for its leave application.

On the other hand, the transactions at issue before the SCC predated the coming into force in Canada of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”) and the principal purpose test contained therein. Accordingly, a future court may have to determine the impact of the MLI on any later transaction.

1 2021 SCC 49
2 Income Tax Act, R.S.C. 1985, c. 1 (5th Supplement), as amended (the “ITA”), subsection 245(2)
3 Pursuant to subsections 2(3) and 115(1) of the ITA.
4 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 (the “Treaty”).
5 In the lower courts, the CRA also argued that the nature of the business carried on by Alta Canada did not meet the technical requirements for the Business Property Exemption to apply.  The CRA did not raise this argument before the SCC.
6 See Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 (“Canada Trustco”) and Copthorne Holdings Ltd. v. Canada, 2011 SCC 63.
7 Within the meaning of subsection 245(1) of the ITA.
8 Within the meaning of subsection 245(3) of the ITA.
9 Vienna Convention on the Law of Treaties, Can. T.S. 1980 No. 37, arts. 26, 31.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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