SCC Dismisses Crown Appeal in Alta Energy Case

Published by Chris Marta & Alexei Paish & Sarah Faber

Last week, the Supreme Court of Canada (“SCC”) dismissed the Crown’s appeal in Canada v. Alta Energy Luxembourg S.A.R.L. (2021 SCC 49). In doing so, the SCC wrestled with important, timely, and politically contentious questions of domestic and international tax policy. Matthew Williams and Rebecca Potter of Thorsteinssons LLP represented the Respondent, Alta Energy Luxembourg S.A.R.L. (“Alta Luxembourg”).


Alta Luxembourg was incorporated under the laws of Luxembourg in 2012. Its sole shareholder was a limited partnership (“Alta Energy Canada Partnership”). On the day it was incorporated, Alta Luxembourg acquired the shares of Alta Energy Partners Canada Ltd. (“Alta Canada”), a Canadian operating company that had been established to carry on an oil and shale business in Alberta.

Alta Luxembourg sold Alta Canada to Chevron Canada Ltd. in 2013 and claimed an exemption for the resulting capital gain (approximately CA$380 million) under Articles 13(4) and (5) of the Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (the “Treaty”).

The Minister of National Revenue (the “Minister”) denied the exemption on the basis that Alta Canada was not “carrying on a business in the property” as required by Article 13(4) and, in the alternative, that the general anti-avoidance rule (the “GAAR”) should apply to deny the application of the Treaty.

Alta Luxembourg successfully appealed the Minister’s decision to the Tax Court of Canada (“TCC”). The Minister appealed that decision (only in respect of the GAAR) to the Federal Court of Appeal (“FCA”) which upheld the decision of the TCC. The Minister successfully sought leave to appeal the decision of the FCA to the Supreme Court of Canada (“SCC”).

Applying the GAAR to the Treaty

The only issue before the SCC was whether the GAAR applied to deny the exemption.

Having conceded that there was a tax benefit and an avoidance transaction, only the third element of the GAAR was at issue: Did application of the Treaty in the circumstances result in misuse or abuse of the Treaty?

To decide whether the transaction was abusive, the judges applied the two-step analysis from Canada Trustco Mortgage Co. v. Canada (2005 SCC 54). First, they interpreted the provisions of the Treaty that Alta Luxembourg had relied on to determine their object, spirit, and purpose. They then considered the facts to determine whether the transaction was consistent with or frustrated the object, spirit, and purpose of those provisions.

What made this case different from most GAAR cases was that the provisions in question come from a bilateral treaty, rather than a domestic tax statute. Justice Côté, writing for a six-judge majority, made particular mention of this fact (at para 36):

Consideration of the contractual element is crucial to the application of the GAAR because it focuses the analysis on whether the particular tax planning strategy is consistent with the compromises reached by the contracting states.

Courts must recognize that the object, spirit, and purpose of a treaty involves compromise between two sovereign states, each with its own economic and policy objectives. Interpreting the Treaty in a way that imposes Canadian tax policy on Luxembourg would not be consistent with that spirit of compromise.

The Crown’s argument was that Alta Luxembourg had frustrated the object, spirit and purpose of two sets of provisions in the Treaty: Articles 1 and 4(1), which define residence status for the purpose of the Treaty; and Articles 13(4) and 13(5), which give the country of residence the exclusive right to tax capital gains derived from the alienation of shares deriving their value principally from immovable property used in a corporation’s business.

Object, spirit and purpose of the residence provisions

Like all tax treaties, the Treaty designates taxing rights between the two countries. Depending on the type of income, it will be taxed by the country where it comes from (i.e. the “source” country) or the country where the taxpayer is resident (i.e. the “residence” country).

Although the Minister conceded that Alta Luxembourg was a resident of Luxembourg for the purposes of the Treaty (i.e., it satisfied the formal requirements for residency under Luxembourg domestic law), the Minister argued Alta Luxembourg should not be able to benefit from the Treaty because it lacked “sufficient substantive economic connections”. The Minister argued that allowing a “shell company” set up for foreign investors to take advantage of Luxembourg tax benefits would frustrate the object, spirit and purpose of the residence provisions in the Treaty.

But, as Justice Côté observed, a formal approach to residency is consistent with international norms and the OECD’s model convention. Many countries apply the formal approach (including Canada) because its certainty and simplicity supports a well-functioning tax system. If the drafters of the Treaty had intended to depart from the OECD model, which reflects international standards, there would need to be some clear indication in the text of the provisions.

Object, spirit and purpose of the business property exemption

The default allocation of taxing rights between countries (as found in the OECD model) typically gives the source country the right to tax income from real property within its borders. However, the “business property exemption” found in the Treaty deviates from that norm and provides that capital gains on shares whose value is derived principally from immovable property in which a business is carried on are to be taxed by the residence country, rather than the source country.

This departure from the default allocation is not commonly found in other treaties and must point to a conscious choice. Justice Côté concluded that the rationale behind the business property exemption was to attract foreign investment to Canada, and that Canada made a deliberate choice to cede certain tax revenues by entering into a treaty on these terms. At the time of negotiation, Luxembourg was a well-known tax haven with an extensive treaty network and it must have occurred to the parties that corporations would use strategies like the one under review in this case to take advantage of the exemption. In fact, such strategies had been specifically addressed in the commentary to the OECD model at that time. This led Justice Côté to conclude (at para 82) that “Canada and Luxembourg made a deliberate choice to leave the business property exemption unguarded.”

In this case, the object, spirit and purpose of the Treaty provisions in question were not frustrated; they operated exactly as they were designed to. While it is open to the federal government to re-negotiate its treaties, the courts cannot be used as a tool to renege on agreements reached with other sovereign states and implemented in Canadian law.

In undertaking her analysis, Justice Côté provided a “cautionary preface” for any GAAR analysis. Of particular note was her caution that “a finding that a bona fide non-tax purpose is lacking, taken alone, should not be considered conclusive evidence of abusive tax avoidance”. Justice Côté observed that this was the mistaken approach taken by the minority and that “it colours their entire analysis”. The goal, it must be remembered, is to ensure that the relevant provisions are properly interpreted in light of their context and purpose.


There was no question that the transaction under review had been structured to avoid Canadian tax. But only abusive tax avoidance is prohibited by the Income Tax Act. This case allowed the SCC to draw a clearer line between what does and does not constitute abusive tax avoidance.

As Justice Côté observed, the proper approach is one that “unifies” the text, context, and purpose, not a purposive one in search of a vague policy objective that is disconnected from the text.