Alta Energy Luxembourg – Tax Court of Canada finds no abuse in non-resident investors using a s.à r.l. to avoid capital gains tax on a new Canadian exploration company

A Blackstone LP and a U.S. shale company held their investment in a Canadian subsidiary (Alta Canada), that was to develop a shale formation in northern B.C., through a Luxembourg s.à r.l. About two years after the acquisition by Altas Canada of the exploration licences, it was sold to Chevron Canada at a significant gain. The s.à r.l. relied on the exclusion in Art. 13(4) of the Canada-Luxembourg Treaty, which provided that the Alta Canada shares were not deemed immovable property (and thus not subject to Canadian capital gains tax) if the Alta Canada licences qualified as property of Alta Canada “in which the business of the company … was carried on.”

The Crown contended that this exclusion should be applied on a licence-by-licence basis, so that virtually all of the property would not be excluded as only six wells had been drilled by Alta Canada by the time of the sale to Chevron. In rejecting this submission, Hogan J noted that Alta Canada, by starting off slowly in its drilling of the formation, was being consistent with its approach of “the development of its working interest on a systematic and commercially prudent basis” and stated:

Since the purpose of the carve-out is to attract foreign direct investments, it is reasonable to assume that the treaty negotiators wanted the exception to be granted in accordance with industry practices.

The Crown also sought to apply the general anti-avoidance rule to deny use of the Treaty exclusion. It was bothered that the capital gain was taxed in neither jurisdiction, whereas the purpose of the Treaty was only to prevent double taxation. Hogan J stated:

[I]f Canada wished to curtail the benefits of the Treaty to potential situations of double taxation, Canada could have insisted that the exemption provided for under Article 13(5) be made available only in the circumstances where the capital gain was otherwise taxable in Luxembourg. Canada and Luxembourg did not choose this option. It is certainly not the role of the Court to disturb their bargain … .

More generally, he considered that, as “the significant investments of the Appellant to de-risk the Duvernay shale constitute an investment in immovable property used in a business,” the rationale for the exclusion had been satisfied.

Accordingly, the gain was Treaty-exempt.

Neal Armstrong. Summaries of Alta Energy Luxembourg S.A.R.L. v. The Queen, 2018 TCC 152 under Treaties – Income Tax Conventions – Art. 13 and s. 245(4).