Why Supreme Court docket dominated Alta Power’s ‘treaty procuring’ not abuse of tax planning

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The Canadian authorities might have been disadvantaged of the capital positive aspects taxes arising from Alta Power’s sale of belongings from its Luxembourg-based firm, however it was completely authorized, in line with the Supreme Court docket of Canada.

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In November, the SCC rejected Ottawa’s declare that the taxpayer, a Luxembourg resident, must be denied the good thing about the Canada-Luxembourg tax treaty as a result of it engaged in treaty procuring and its financial ties to Luxembourg had been inadequate. In its choice, the SCC dominated that the federal authorities can’t use the final anti-avoidance provisions (GAAR) of the Revenue Tax Act to displace the tax advantages contemplated by the worldwide treaty.

“The court docket made it clear that treaty procuring, even when considered morally reprehensible, doesn’t represent abusive tax planning,” stated David Rotfleisch of Toronto tax boutique Rotfleisch & Samulovitch P.C.

The choice concerned massive capital positive aspects arising from Alta Power Luxembourg SARL’s sale of the shares of its wholly-owned Canadian subsidary, Alta Power Companions Canada Ltd., a shale oil developer in Northern Alberta.

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The Luxembourg-resident mother or father claimed an exemption from Canadian revenue tax beneath the Canada-Luxembourg Tax Conference 1999. However the Canada Income Company maintained that GAAR operated to disclaim the exemption: as a result of the mother or father’s ties to Luxembourg had been insufficiently substantive and the corporate had engaged in treaty procuring, CRA argued, resort to the exemption was an “abuse” or “misuse” that triggered the anti-avoidance provisions.

However a majority of six judges on the nine-member court docket rejected the CRA’s argument.

“The court docket acknowledged that the treaty was a deliberate coverage choice reached after negotiation between two sovereign nations and that the CRA shouldn’t count on judges to stomp on all the things the Company deemed objectionable,” Rotfleisch stated.

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As the bulk noticed it, GAAR was relevant provided that the court docket ascertained that what the taxpayer had completed was abusive within the sense of inconsistent with the treaty’s phrases.

“The court docket reiterated that, wanting abusive behaviour, taxpayers are allowed to attenuate their tax liabilities,” stated Steve Suarez, a tax associate in Borden Ladner Gervais LLP’s Toronto workplace. “What meaning is that even a transaction that’s fully tax-motivated isn’t essentially abusive, and that it isn’t the position of the court docket to make morality judgments.”

Right here, the intentions of the treaty companions had been clear from the textual content and context of the treaty. It might not be acceptable, within the majority’s view, to permit Canada to “revisit its cut price” with Luxembourg in a manner that precluded sure residents — together with these with allegedly inadequate ties to Luxembourg — from treaty advantages. What was acceptable was to respect the best way wherein the events outlined the requirement of residency beneath their home legislation. From the latter perspective, the mother or father firm was undeniably a Luxembourg resident.

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GAAR, the bulk added, was supposed to use to unexpected tax planning methods. Alta Luxembourg’s use of a conduit company, nonetheless, was not unexpected when the treaties had been negotiated and will have been —however was not — addressed via quite a lot of extra anti-avoidance provisions.

“Certainly, in agreeing to incorporate the carve-out within the  Treaty , Canada   sought to encourage investments by Luxembourg residents in enterprise belongings embodied in immovable property positioned in Canada (e.g.   mines, motels, or oil shales) and to reap the following financial advantages,” the bulk wrote. “This incentive was by no means supposed to be restricted to Luxembourg residents with ‘adequate substantive financial connections’ to Luxembourg. Internationally, residency usually doesn’t rely upon the existence of such connections; formal standards for residency are simply as effectively accepted as factual standards.”

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In line with Suarez, Ottawa was asking the SCC to do one thing that it wouldn’t do for itself.

“At no level did Ottawa move a home legislation to fight treaty procuring, which is one thing it thought of in 2014 and deserted,” he stated. “Nor has it printed any technical rationalization as to how treaties must be interpreted, just like the one which exists for the Canada-U.S. treaty.”

Extra not too long ago, 96 international locations, together with Canada and plenty of of its treaty companions (however not the U.S.) have signed and ratified the OECD’s Multilateral Conference to Implement Tax Treaty Associated Measures to Stop Base Erosion and Revenue Shifting (MLI), which got here into pressure in 2018. The MLI introduces the principal goal take a look at (PPT), which discourages treaty procuring by denying advantages the place the precept goal of an association or transaction is to safe the profit, except granting the profit would accord with the article and goal of the treaty.

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“Finally, the SCC’s choice is to a lot the identical impact because the PPT given the court docket’s concentrate on the article and goal of treaties,” Suarez stated. “So I believe the evaluation will probably be very related to the interpretation of the MLI going ahead.”

However William Innes, a veteran Toronto tax lawyer, is very vital of the SCC ruling.

“The case illustrates that, with the departure of Chief Justice Beverley McLachlin and Justice Marshall Rothstein, there’s no choose on the court docket with a major background in tax,” he stated. “The bulk’s reasoning is a really brittle, type of ‘gotcha’ strategy, and harkens again to the best way courts interpreted tax treaties within the eighties by disregarding, amongst different issues, the financial actuality that the mother or father firm was nothing greater than a file within the workplace of some firm registrar.”

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Nonetheless that could be, Innes expects that the feds will seemingly try to negate the ruling with an modification to the Tax Conference Interpretation Act, a course they proposed however didn’t pursue in 2013.

“In any case, the Tax Conference Act was initially handed to reverse a 1982 SCC tax choice holding that assure charges weren’t curiosity and subsequently not topic to withholding tax beneath Canada’s tax treaty with Germany.”

Julius Melnitzer is a Toronto-based authorized affairs author.

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