Tax Planning

Why the Supreme Courtroom Dominated Alta Power’s “Treaty Purchasing” shouldn’t be an abuse of tax planning

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Aside from abusive behavior, companies are allowed to minimize their tax liabilities

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Julius Melnitzer The Supreme Court of Canada in Ottawa on June 17, 2021. The Supreme Court of Canada in Ottawa on June 17, 2021. Photo by Justin Tang / The Canadian Press Files

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The Canadian government may have had capital gains taxes withdrawn from the sale of Alta Energy’s assets by its Luxembourg-based company, but it was perfectly legal to do so, according to the Supreme Court of Canada.

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In November, the SCC rejected Ottawa’s request that the Luxembourg-resident taxpayer should be denied the benefits of the Canada-Luxembourg tax treaty because it was making treaty purchases and its economic ties with Luxembourg were inadequate. In its decision, the SCC decided that the federal government cannot use the general avoidance regulations (GAAR) of the Income Tax Act to suppress the tax advantages provided for in the State Treaty.

“The court has made it clear that” treaty shopping “, even if it is viewed as morally reprehensible, does not constitute improper tax planning,” said David Rotfleisch of the Toronto tax boutique Rotfleisch & Samulovitch PC

The decision included large capital gains on the sale by Alta Energy Luxembourg SARL of the shares in its wholly-owned Canadian subsidiary Alta Energy Partners Canada Ltd., a shale oil developer in northern Alberta.

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The Luxembourg resident parent applied for Canadian income tax exemption under the 1999 Canada-Luxembourg Tax Agreement. However, the Canada Revenue Agency alleged that GAAR denied the exemption: because the parent’s connection with Luxembourg was inadequate and the company was in Contract shopping, CRA argued, resorting to the exception was an “abuse” or “abuse” that sparked the anti-circumvention rules.

But a majority of six judges in the nine-member court rejected the CRA’s argument.

“The court recognized that the treaty was a deliberate political decision made after negotiations between two sovereign nations, and that the CRA should not expect judges to trample on anything the agency deemed offensive,” said Rotfleisch.

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According to the prevailing opinion, the GAAR is only applicable if the court has determined that the taxpayer’s conduct is abusive within the meaning of the contractual provisions.

“The court reiterated that taxpayers are allowed to minimize their tax debts other than abusive behavior,” said Steve Suarez, tax partner at Borden Ladner Gervais LLP’s Toronto office. “This means that even a purely tax-motivated transaction is not necessarily abusive and that it is not the task of the court to make moral judgments.”

The intentions of the contracting parties were clearly evident from the contract text and context. The majority felt that it would not be appropriate to allow Canada to redo its agreement with Luxembourg in a way that excludes certain residents – including those with allegedly inadequate ties with Luxembourg – from the benefits of the treaty. It was appropriate to respect the way in which the parties defined the residence requirement under their national law. From the latter point of view, the parent company was undeniably based in Luxembourg.

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GAAR, added the majority, should be applied to unforeseen tax planning strategies. However, Alta Luxembourg’s use of a conduit company was not unforeseen in the negotiations of the contracts and could have been addressed by a number of additional anti-circumvention provisions, but has not been.

“By agreeing to include the spin-off in the contract, Canada attempted to encourage investments by Luxembourg residents in real estate assets located in Canada (e.g. mines, hotels or oil shale) and to take advantage of the resulting economic benefits.” wrote the majority. “This incentive should never be limited to Luxembourg residents with ‘sufficient substantial economic ties’ to Luxembourg. At the international level, domicile does not usually depend on the existence of such connections; formal criteria for the stay are accepted as well as factual criteria. “

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According to Suarez, Ottawa was telling the SCC to do something it wouldn’t do itself.

“Ottawa never passed a domestic law to combat contract shopping that was considered and abandoned in 2014,” he said. “Neither has it published a technical explanation of how contracts should be interpreted, as is the case for the Canada-US treaty.”

Recently, 96 countries, including Canada and many of its contractual partners (but not the US) signed and ratified the OECD’s Multilateral Agreement on the Implementation of Tax Contract-Related Measures to Prevent Profit Reduction and Profit Shifting (MLI) in 2018. The MLI introduces the Primary Purpose Test (PPT) who discourages the purchase of a contract by denying benefits when the primary purpose of an agreement or transaction is to secure the benefit, unless the granting of the benefit would be consistent with the aim and purpose of the contract.

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“Ultimately, given the court’s focus on the aim and purpose of contracts, the SCC’s decision has about the same effect as the PPT,” said Suarez. “Therefore I think that the analysis will be very relevant for the future interpretation of the MLI.”

But William Innes, an experienced tax attorney from Toronto, is very critical of the SCC ruling.

“The case shows that with the departure of Chief Justice Beverley McLachlin and Justice Marshall Rothstein, there is no judge with a significant background in taxation,” he said. “The majority’s reasoning is very brittle, a kind of ‘gotcha’ approach, and draws on the courts’ interpretation of tax treaties in the 1980s, disregarding, among other things, the economic reality that the parent company is nothing but one The file in the file was the office of a company registrar. “

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Anyway, Innes expects federal agencies will likely attempt to negate the ruling with an amendment to the Tax Convention Interpretation Act, a course they proposed but failed to follow in 2013.

“After all, the Tax Convention Act was originally enacted to repeal a 1982 SCC tax ruling that guaranteed fees were non-interest and therefore not subject to withholding tax under Canada’s double taxation treaty with Germany.”

Julius Melnitzer is a Toronto-based legal writer.

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