Alta Energy – Federal Court of Appeal confirms that Treaty shopping was not an abuse

A Blackstone LP and a U.S. shale company transferred their investment in a Canadian subsidiary (Alta Canada), that was to develop a shale formation in northern B.C., to a Luxembourg s.à r.l (Alta Luxembourg – which, in turn, they held through an Alberta partnership). About two years after the acquisition by Altas Canada of the exploration licences, it was sold to Chevron Canada at a significant gain. In the Court of Appeal, the Crown conceded that the gain of Alta Luxembourg was exempted from Canadian capital gains tax by virtue of 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) on the basis that the exploration licences were property of Alta Canada “in which the business of the company … was carried on.” However, it in effect argued that pure Treaty shopping was an abuse under s. 245(4).

Webb JA rejected the particular Crown arguments in this regard -- that the object, spirit and purpose of Art. 13(4) required that:

  • Alta Luxembourg be an “investor” (he stated that “There is nothing to suggest that the underlying rationale for the exemption is that it would only be available to a resident of Luxembourg who invests in the particular corporation … .”)
  • there be a potential to realize income in Luxembourg, whereas here the gain was offset by variable interest payable by Alta Luxembourg to the Alberta partnership (he stated “There is no basis to find that the rationale for the definition of ‘resident’ would suggest that any criteria other than the criteria included in the definition of resident in Article 4, should be used … .”)
  • the exemption be accessed only by persons who have some commercial or economic ties to Luxembourg (he stated that “There is no distinction in the Luxembourg Convention between residents with strong economic or commercial ties and those with weak or no commercial or economic ties.”)

He concluded:

I agree with … MIL that the object, spirit and purpose of the relevant provisions of the Luxembourg Convention is reflected in the words as chosen by Canada and Luxembourg.

Neal Armstrong. Summary of Canada v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 43 under s. 245(4).