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

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The Canadian authorities could 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 response to the Supreme Court docket of Canada.

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In November, the SCC rejected Ottawa’s declare that the taxpayer, a Luxembourg resident, ought to be denied the advantage of the Canada-Luxembourg tax treaty as a result of it engaged in treaty purchasing and its financial ties to Luxembourg have 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 purchasing, even when considered morally reprehensible, doesn’t represent abusive tax planning,” mentioned 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 earnings tax underneath 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 have been insufficiently substantive and the corporate had engaged in treaty purchasing, 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 every part the Company deemed objectionable,” Rotfleisch mentioned.

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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 reduce their tax liabilities,” mentioned Steve Suarez, a tax companion in Borden Ladner Gervais LLP’s Toronto workplace. “What meaning is that even a transaction that’s totally tax-motivated is just not essentially abusive, and that it’s not the function of the court docket to make morality judgments.”

Right here, the intentions of the treaty companions have been clear from the textual content and context of the treaty. It will not be applicable, within the majority’s view, to permit Canada to “revisit its cut price” with Luxembourg in a approach that precluded sure residents — together with these with allegedly inadequate ties to Luxembourg — from treaty advantages. What was applicable was to respect the best way through which the events outlined the requirement of residency underneath 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, nevertheless, was not unexpected when the treaties have been negotiated and will have been —however was not — addressed via quite a lot of further 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, accommodations, 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 sometimes doesn’t rely on the existence of such connections; formal standards for residency are simply as properly accepted as factual standards.”

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In response to 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 purchasing, which is one thing it thought-about in 2014 and deserted,” he mentioned. “Nor has it printed any technical clarification as to how treaties ought to 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 Forestall Base Erosion and Revenue Shifting (MLI), which got here into pressure in 2018. The MLI introduces the principal function take a look at (PPT), which discourages treaty purchasing by denying advantages the place the precept function of an association or transaction is to safe the profit, except granting the profit would accord with the item and function 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 item and function of treaties,” Suarez mentioned. “So I believe the evaluation will likely be very related to the interpretation of the MLI going ahead.”

However William Innes, a veteran Toronto tax lawyer, is very crucial 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 mentioned. “The bulk’s reasoning is a really brittle, sort 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 which may be, Innes expects that the feds will doubtless try and 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 due to this fact not topic to withholding tax underneath Canada’s tax treaty with Germany.”

Julius Melnitzer is a Toronto-based authorized affairs author.

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