Alta Energy: SCC confirms GAAR not applicable to treaty shopping


In Canada v. Alta Energy Luxembourg S.A.R.L, the Supreme Court of Canada (SCC) upheld the lower courts’ decision that Alta Energy’s restructuring to avail itself of treaty benefits in the Canada-Luxembourg Tax Treaty (the Treaty) was not abusive tax avoidance and, therefore, the General Anti-Avoidance Rule (GAAR) did not apply.

The relevant facts are as follows: a US LLC owned shares of a Canadian corporation (Canco) that was engaged in oil and gas exploration. If the US LLC had sold the shares of Canco, the capital gain would have been taxable in Canada. The US LLC undertook a restructuring in which it transferred the shares of the Canco to Alta Energy, a corporation resident in Luxembourg. Alta Energy sold the Canco shares and took the position that the capital gain was not taxable in Canada due to Article 13(4) of the Treaty, which provides an exemption for residents of Luxembourg when the value of the shares is derived principally from immovable property that is situated in Canada, and in which the business of the company was carried on.

The government argued that the object, spirit and purpose of the relevant provisions – and of the Treaty as a whole – is that taxes should be paid on income, where the income has the strongest economic ties. This is referred to as the theory of ‘economic allegiance’, under which an economic connection between the state and the taxpayer serves as the basis for taxation. The government’s position was that accessing the Treaty exemption simply by incorporating a company in Luxembourg without any actual investment in, or economic connection to, Luxembourg, was treaty shopping that abused the above-noted object, spirit and purpose of the relevant Articles of the Treaty. Therefore, the GAAR applied to tax Alta Energy’s capital gain in Canada. 

The majority of the SCC (six of the nine SCC Judges) dismissed the government’s argument and held that the GAAR did not apply. The majority’s decision outlined the following interpretive principles when considering the application of the GAAR to the Treaty:

  • The GAAR invites courts to look beyond the text of a provision to determine the object, spirit and purpose of the provision, but the text of the provision cannot be ignored. Instead, “[t]he proper approach is one that unifies the text, context, and purpose, not a purposive one in search of a vague policy objective disconnected from the text.”
  • The broad purpose of all treaties is to allocate taxing rights between the countries, and the principle that underlies this purpose is economic allegiance. However, economic allegiance is not the only principle or policy consideration that underlies each treaty provision. Therefore, when considering the application of the GAAR to specific treaty provisions, the principle of economic allegiance must be balanced against the principles that underlie the specific treaty provisions.
  • The principles that underlie Article 13(4) of the Treaty are capital import neutrality, the concern to prevent tax base erosion and the desire to attract foreign investment. Due to these underlying principles, the theory of economic allegiance is not the dominating rationale underlying Article 13(4).
  • Treaty shopping may be considered immoral but is not abusive.

What about the MLI?

At the time of the US LLC’s transfer of the Canco shares to Alta Energy, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) was not in force. The MLI has measures to prevent treaty abuse, including treaty shopping. Specifically, the MLI has a Principal Purpose Test (PPT), which allows governments to deny treaty benefits to a business if the principal purpose of a business arrangement or transaction was to directly or indirectly obtain a tax benefit. Canada has been a signatory to the MLI since Dec. 1, 2019, meaning that, for Canada’s tax treaties with countries that are also signatories to the MLI, the SCC’s finding that treaty shopping did not abuse the Treaty may be of less significance because the government can use the PPT to challenge treaty shopping. 

Evolution of the GAAR

This case instructs that when conducting a GAAR analysis, the text of the relevant provisions cannot be overlooked in favour of a broader purpose that underlies the provision but is wholly absent from the text itself. Instead, the broader purpose must be unified – balanced, if necessary – with the principles that underlie the text of the provision. 

The government already stated that it is looking at ‘modernizing’ (strengthening?) the GAAR. The Minister’s loss in Alta Energy should augment the government’s aspiration to ‘modernize’ the GAAR.


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Maria Severino

National Tax Leader

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