GAAR can be invoked against ‘Treaty Shopping’ only if it leads to abuse of tax treaty: Canada SC

Case Details: Her Majesty The Queen v. Alta Energy Luxembourg S.A.R.L - [2022] 144 taxmann.com 23 (SCC)

Judiciary and Counsel Details

• • Abella, Moldaver, Karakatsanis, Cote, Brown, Rowe, Martin & Kasirer, JJ.

Facts of the Case

In the given case, a large capital gain was realized by corporate resident of Luxembourg on the sale of shares whose value was derived principally from immovable property situated in Canada. An exemption was claimed under the carve-out provision of Article 13(4) of the Canada-Luxembourg Treaty.

Revenue denied the exemption by invoking GAAR and hold that Luxembourg-company had no “sufficient substantive economic connections” to Luxembourg. Thus, the treaty benefits under Article 13(4) cannot be claimed.

Supreme Court Held

The Supreme Court of Canada has ruled that Treaty Shopping per se is not abusive tax avoidance to attract General Anti-avoidance Rule (GAAR). Treaty Shopping is abusive tax avoidance and attracts GAAR, only when treaty shopping spoils the treaty bargain between two contracting states.

Luxembourg is a country well known for its broad tax treaty network and international tax haven regime, making it an attractive jurisdiction to set up a conduit corporation and take advantage of treaty benefits.

One can presume that Canada knew these features of Luxembourg’s tax system when it entered into the Treaty. Canada nevertheless entered into a bilateral tax treaty with Luxembourg with only minimal safeguards and thereby ignored many of the OECD’s suggestions.

Canada understood that it was dealing with a low-tax jurisdiction and it agreed to specific terms in the Treaty, such as the business property exemption. In this way, Canada effectively agreed to give up its right to tax certain entities incorporated in Luxembourg in exchange for the jobs and economic opportunities that the business property exemption would promote.