Case information

Legislation - Interpretation - Taxation - International Tax Treaties - Did the Federal Court of Appeal err in law in equating the object, spirit and purpose of the relevant treaty provisions with their textual meaning - Did the Federal Court of Appeal err in law and in fact in concluding that the avoidance transactions in this case did not result in an abuse of the relevant treaty provisions - Income Tax Act, R.S.C. 1985, c. 1 (5th Supp), ss. 2(3), 115(1) and 248(1) - 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, Articles 1, 4, 13(4) and 13(5).

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The respondent, a resident of Luxembourg, claimed an exemption from Canadian income tax under Article 13(5) of the Canada-Luxembourg Income Tax Convention 1999 (Treaty) for a large capital gain arising from the sale of the shares of its wholly-owned Canadian subsidiary, Alta Energy Partners Canada Ltd. (“Alta Canada”). Alta Canada carried on an unconventional shale oil business in the Duvernay shale oil formation of Northern Alberta, controlling a net acreage of 67,891 and drilling six horizontal and vertical wells in the relevant period. An issue arose as to the application of Article 13(4) of the Treaty, under which Canada retains the right to tax capital gains arising from the disposition of shares whose value derives principally from immovable property. The respondent relied upon an exclusion to that provision that applies when the business of the company was carried on in the property. The appellant denied the exemption on the ground that substantially all Alta Canada’s interest remained Immoveable Property because it drilled and extracted in only a small portion of the area it controlled and had allegedly acquired the leases and licenses with an intention of selling them in the short-term. Alternatively, the appellant argued that the General Anti-Avoidance Rule (“GAAR”) under s. 245 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) (the “Act”) operated to deny the tax benefit. The parties agreed that there was a “tax benefit” and an “avoidance transaction” but disagreed on whether an “abuse” or “misuse” triggered the application of GAAR.

The Tax Court of Canada allowed the respondent’s appeal of the reassessments for the 2013 taxation year and referred the matter back to Minister for reconsideration and reassessment in accordance with its reasons for judgment. It held that the respondent’s interest in the property constituted Excluded Property and that the GAAR did not prevent the respondent’s entitlement to the exemption under Article 13(5) of the Treaty. The Federal Court of Appeal dismissed the appellant’s appeal.