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FEDERAL INCOME TAX - Capital gains exemption - Non-residents - Tax treaties

Tuesday, March 31, 2020 @ 9:20 AM  


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Appeal by the Crown from a judgment of the Tax Court that allowed the respondent’s appeal from an income tax assessment. The Minister of Revenue found a $380 million capital gain the respondent realized as a result of the disposition of the shares of Alta Energy Partners Canada (“Alta Canada”) was taxable in Canada. Alta Canada, incorporated in Alberta, carried on an unconventional shale oil business in Alberta. The respondent conceded there was a tax benefit and an avoidance transaction when it sold its shares. The Tax Court found the Luxembourg Convention applied and made the capital gain exempt from taxation in Canada. It further found the general anti-avoidance rule did not apply as there had been no abuse of the Income Tax Act or the Luxembourg Convention. The Crown did not challenge the finding that the Luxembourg Convention applied.

HELD: Appeal dismissed. The general anti-avoidance rule could not be used to justify adding a requirement for investment in the corporation to qualify for the exemption that was not present in the Luxembourg Convention. Whether Luxembourg would impose any income tax on the respondent was a matter for the Luxembourg tax authorities. There was no basis to find the exemption only applied to Luxembourg residents with strong economic or commercial ties to Luxembourg. The rationale for the exemption in the Luxembourg Convention could be found in the text of the provisions. The object, spirit and purpose of Articles 1, 4 and 13(4) of the Luxembourg Convention were that a person qualified for the exemption, which was applicable to gains arising on the disposition of certain shares, if the person was a resident of Luxembourg and the value of the shares was principally derived from immovable property situated in Canada in which the business of that corporation was carried on. Since the provisions operated as they were intended to operate, there was no abuse of the Luxembourg Convention.

Alta Energy Luxembourg S.A.R.L. v. Canada, [2020] F.C.J. No. 204, Federal Court of Appeal, W.W. Webb, D.G. Near and G.R. Locke JJ.A., February 12, 2020. Digest No. TLD-March302020005