Her Majesty The Queen Appellant v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49

SUPREME COURT OF CANADA Citation: Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 Appeal Heard: March 19, 2021 Judgment Rendered: November 26, 2021 Docket: 39113 Between: Her Majesty The Queen Appellant and Alta Energy Luxembourg S.A.R.L. Respondent Coram: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.

Reasons For Judgment: (paras. 1 to 97 ) Côté J. (Abella, Moldaver, Karakatsanis, Brown and Kasirer JJ. concurring) Joint Dissenting Reasons: (paras. 98 to 189 ) Rowe and Martin JJ. (Wagner C.J. concurring) Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports . Her Majesty The Queen Appellant v.

Alta Energy Luxembourg S.A.R.L. Respondent Indexed as: Canada v. Alta Energy Luxembourg S.A.R.L. 2021 SCC 49 File No.: 39113. 2021: March 19; 2021: November 26.

Present: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ. on appeal from the federal court of appeal Taxation — Income tax — Tax avoidance — Application of general anti-avoidance rule — Large capital gain realized by corporate resident of Luxembourg on sale of shares whose value derived principally from immovable property situated in Canada — Corporation claiming exemption from Canadian tax on basis that shares were protected property under tax treaty between Canada and Luxembourg — Whether general anti-avoidance rule applicable to deny requested exemption — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 245 — 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, Can.

T.S. 2000 No. 22, art. 13. In 2011, two American firms founded an American company for the purpose of acquiring and developing unconventional oil and natural gas properties. Alta Energy Partners Canada Ltd. (“Alta Canada”), a wholly owned Canadian subsidiary of that company, was incorporated in order to carry on that business. A restructuring of Alta Canada was undertaken in 2012. As part of the restructuring, Alta Energy Luxembourg S.A.R.L. (“Alta Luxembourg”) was incorporated under the laws of Luxembourg and its shares were issued to a new Canadian partnership.

On the same day, Alta Luxembourg purchased all of the shares of Alta Canada. In 2013, it sold those shares, realizing a capital gain in excess of $380 million. Payment for the shares was organized so that Alta Luxembourg did not receive any of the sale proceeds. Following the sale, Alta Luxembourg did not conduct any other business or hold any other investments. The capital gain was reported to the Luxembourg tax authorities and was subject to full taxation under Luxembourg’s domestic laws.

In its Canadian tax return for 2013, Alta Luxembourg claimed an exemption from Canadian tax on the basis that the gain was not included in its “taxable income earned in Canada” under s. 115(1) (

b) of the Income Tax Act (“ Act ”) because the shares were “treaty-protected property” under art. 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 (“ Treaty ”).

Article 13(4) of the Treaty creates an exemption for residents of Luxembourg from Canadian tax arising from a capital gain on the alienation of shares the value of which is derived principally from immovable property situated in Canada and in which the business of the company was carried on. The Minister denied the treaty exemption. Alta Luxembourg appealed to the Tax Court of Canada.

The Minister argued that the business property exemption in art. 13(4) of the Treaty did not apply and, in the alternative, if the shares did qualify as treaty-protected property, that the general anti-avoidance rule (“GAAR”) in s. 245 of the Act should apply. The Tax Court found that the shares were treaty-protected property. With respect to the GAAR, the parties agreed that the restructuring was an “avoidance transaction” as defined in s. 245(3) of the Act that resulted in a tax benefit.

The Tax Court held that the avoidance transaction did not result in a misuse or abuse of the provisions of the Act or the Treaty . The Federal Court of Appeal dismissed the Minister’s appeal, which raised only the issue of whether the GAAR applied. Held (Wagner C.J. and Rowe and Martin JJ. dissenting): The appeal should be dismissed. Per Abella, Moldaver, Karakatsanis, Côté , Brown and Kasirer JJ.: The Minister has not discharged her burden of proving abusive tax avoidance.

In agreeing to include a specific exemption for immovable property in the Treaty , Canada sought to encourage investments by Luxembourg residents in business assets embodied in immovable property located in Canada and to reap the ensuing benefits. Alta Luxembourg made exactly such an investment. It is a resident of Luxembourg and, as such, is exempt from Canadian taxes on the capital gain realized on the disposition of shares of its wholly owned Canadian subsidiary.

The GAAR acts as a legislative limit on both tax certainty and the well-accepted principle that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable. It bars abusive tax avoidance transactions, including those in which taxpayers seek to obtain treaty benefits that were never intended by the contracting states, but it cannot be used to fundamentally alter the criteria under which a person is entitled to the benefits of a treaty .

Applying the GAAR involves a three-part process meant to determine: (1) whether there is a tax benefit arising from a transaction; (2) whether the transaction is an avoidance transaction; and (3) whether the avoidance transaction is abusive. To determine whether a transaction is abusive, the Court has set out a two-step inquiry. Under the first step, the provisions relied on for the tax benefit are interpreted to determine their object, spirit, and purpose. In cases of treaty

interpretation, this must be done with a view to implementing the true intention of the parties. Under the second step, a factual analysis determines whether the avoidance transaction at issue frustrates the object, spirit, and purpose of the provisions. The object, spirit, and purpose of the business property exemption provided for in art. 13(4) and (5) of the Treaty are to foster international investment.

The object, spirit, and purpose of arts. 1 and 4, which make residence central to the application of the Treaty , are to allow all persons who are residents under the laws of one or both of the contracting states to claim benefits under the Treaty , so long as their resident status could expose them to full tax liability. According to art. 4, “residence” under the Treaty is based on liability to tax in one or both of the contracting states by reason of domicile, residence, place of management or another similar criterion.

In the context of corporations, the “liable to tax” requirement is met where the domestic law of a contracting state exposes a corporation to full tax liability because it has its residence in that state. Residence is to be defined by the laws of the contracting state in which residence is claimed. Consistent with international practice, Luxembourg law grants resident status to corporations having either their legal seat or their central management in Luxembourg. This does not depart from accepted usage such that the bargain struck in the

Treaty could be upheld only if Luxembourg residents claiming benefits have sufficient substantive economic connections to their country of residence. If the drafters had truly intended to include only corporations with sufficient substantive economic connections to their country of residence within the scope of the Treaty , they would have clearly signalled their intention to depart from a well-established criterion like the “place of incorporation” or “legal seat”.

Another contextual element further reinforces the conclusion that the purpose of arts. 1 and 4 of the Treaty is not to reserve benefits to corporations with sufficient substantive economic connections to their country of residence: the inclusion of art. 28(3) in the Treaty , which denies benefits to certain Luxembourg holding companies. The parties’ choice of this approach should be understood as a rejection of the relevance of economic ties for delineating which corporations should be entitled to benefits and which should not.

This choice suggests that the drafters intended to exclude a corporation with minimal economic connections to one of the contracting states only where the corporation is a holding company benefiting from Luxembourg’s well known international tax haven regime. In light of this clear intention, the spirit of arts. 1 and 4 was not to limit access to the benefits of the Treaty to corporations with sufficient substantive economic connections to their country of residence.

Although the absence of specific anti-avoidance rules is not necessarily determinative of the application of the GAAR, their absence sheds light on the contracting states’ intention. This is not a case where Parliament did not or could not have foreseen the tax strategy employed by the taxpayer. The use of conduit corporations — legal entities created in a state essentially to obtain treaty benefits that would not be available directly — was not an unforeseen tax strategy at the time of the Treaty .

Options to remediate the situation were available and known by the parties, but they made deliberate choices to guard some benefits against conduit corporations and to leave others unguarded. Had the parties truly intended to prevent such corporations from taking advantage of the business property exemption, they could have done so. Combined with Canada’s preference at the time of the Treaty for taking advantage of the economic benefits yielded by foreign investments rather than higher tax revenues, this makes the rationale of the business property exemption even clearer.

The fact that the capital gains may not be taxed in Luxembourg, leading to double non-taxation, and the fact that conduit corporations can take advantage of the business property exemption are tax planning outcomes consistent with the bargain struck between Canada and Luxembourg. In raising the GAAR, Canada is now seeking to revisit its bargain in order to secure both foreign investments and tax revenues. Tax treaties are replete with choices.

One key choice made by Canada and Luxembourg in negotiating the Treaty was to deviate from the OECD Model Tax Convention on Income and on Capital by allocating to a person’s residence state the right to tax capital gains realized on the disposition of shares or other similar interests deriving their value principally from immovable property used in a corporation’s business.

The business property exemption is a clear departure from the theory of economic allegiance, under which the parties to a treaty avoid double taxation by allocating the right to collect taxes to the contracting state to which the income and the taxpayer are more closely connected. 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.

The provisions of the Treaty operated as they were intended to operate —the avoidance transaction neither defeated nor frustrated the object, spirit, or purpose of the provisions in issue. Therefore, there was no abuse, so the GAAR cannot be applied to deny the tax benefit claimed. The Treaty makes it clear that Canada and Luxembourg agreed that the power to tax would be allocated to Luxembourg where the conditions of the business property exemption were met.

There is nothing in the Treaty suggesting that a single-purpose conduit corporation resident in Luxembourg cannot avail itself of the benefits of the Treaty due to some other consideration. The provisions of the Treaty operated as they were intended to operate; there was no abuse, and, therefore, the GAAR cannot be applied to deny the tax benefit claimed. Per Wagner C.J. and Rowe and Martin JJ. (dissenting): The appeal should be allowed. Alta Luxembourg’s claim for a tax benefit under the Treaty is the result of abusive avoidance transactions.

The courts below did not properly identify the rationale underlying the relevant provisions of the Treaty . They gave weight only to the text and failed to consider why the provisions were put in place. This is not the exercise mandated under the GAAR. Technical compliance with a tax treaty in a way that frustrates the underlying rationale of the provisions relied upon by the taxpayer is precisely what triggers the GAAR.

Although it is a long standing principle in Canadian law that taxpayers may arrange their affairs to minimize their amount of tax payable, an unbridled application of that principle can mislead taxpayers into believing that tax plans that merely comply with the technical provisions of the Act are acceptable. Similarly, treaty shopping is not inherently abusive, but where taxing rights in a tax treaty are allocated on the basis of economic allegiance and conduit entities claim tax benefits despite the absence of any genuine economic connection with the state of residence, treaty shopping is abusive.

Canada has acted to curb abusive international tax avoidance by enacting the GAAR, which denies tax benefits when taxpayers engage in transactions that conform with the text of the tax rules relied upon, but do not accord with their rationale. As such, the GAAR vests upon courts the unusual duty to look beyond the words of the applicable provisions to determine whether the transactions in question frustrate their underlying rationale. An

interpretation confined to the black letter of these legislative provisions would defeat Parliament’s will and fail to fulfil the courts’ role. As the question under the GAAR is not whether the taxpayer can claim a tax benefit, but rather why the benefit was conferred, a GAAR analysis is not constrained by the text in the same way as a traditional statutory

interpretation. While this gives rise to a degree of uncertainty for taxpayers, allowing the GAAR to create this uncertainty was a deliberate choice that Parliament made when it enacted a provision that can defeat tax avoidance schemes that exploit Canada’s legislation and treaties. Where those schemes cross the line into abusive tax avoidance, a finding that the GAAR applies does not run counter to the principles of certainty, predictability and fairness.

The allocation of taxing powers in the Treaty follows the theory of “economic allegiance”, so the object, spirit or purpose of the relevant provisions of the Treaty is to assign taxing rights to the state with the closest economic connection to the taxpayer’s income. Under art. 13(5), the state of residence retains its jurisdiction to tax capital gains unless the exceptions in art. 13(1) to (4) apply.

Article 13(1) preserves the right of the source state to tax gains derived from immovable property situated in that state, and art. 13(4) preserves the source state’s right to tax capital gains arising from the disposition of shares the value of which is derived principally from immovable property situated in that state, unless the company carries on business in the property. The business property exemption assigns the right to tax capital gains arising from the disposition of immovable property in which business is carried on to the resident state.

The rationale behind the business property exemption is to encourage investment; it reflects the fact that the business activity,

rather than the immovable property itself, drives the value of the property. Article 13(4) therefore allocates to Luxembourg the right totax its residents’ indirect gains from immovable property situated in Canada used in a business. In the instant case, the abuse is clear. Alta Luxembourg had no genuine economic connections with Luxembourg as it was amere conduit interposed in Luxembourg for residents of third-party states to avail themselves of a tax exemption under the Treaty. Thislack of any genuine economic connection to Luxembourg frustrates the rationale of the relevant provisions of the Treaty.

The federalgovernment did not deliberately set out to create the conditions for unlimited tax avoidance by means of schemes such as that in whichAlta Luxembourg was used. The Court should not legitimize such blatantly abusive tax avoidance based on the view that Canada shouldhave negotiated different treaty terms. Ex ante speculation about how the treaty parties ought to have proceeded based on alternativessaid to have been available to them gives primacy to what is not there. Parliament was entitled to rely on the GAAR to address abusiveuses of the Treaty rather than negotiate the inclusion of a specific rule.

The focus should be on what was actually agreed upon andwhether the underlying rationale of the relevant provisions was frustrated by the avoidance transactions undertaken. In the give and takeof treaty negotiation, Canada certainly did not give up the GAAR. The facts of this case are a patent example of a sophisticated taxpayer effecting a restructuring on the basis of professionaltax advice to avoid Canadian tax. In such cases, the principle of fairness ought not to be ignored.

As for the degree of uncertaintyintroduced by the GAAR, it is counterbalanced by the Crown’s burden to show that the avoidance transactions frustrates the object, spiritor purpose of the provisions relied on by the taxpayer and by the fact that any doubt under the GAAR analysis is to be resolved in favourof the taxpayer. Cases Cited By Côté J. Applied: Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601; Copthorne Holdings Ltd. v.Canada, 2011 SCC 63, [2011] 3 S.C.R. 721; approved: Prévost Car Inc. v. Canada, 2009 FCA 57, [2010] 2 F.C.R. 65; referred to: R.v.

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Interpretation of Income Tax Treaties with Particular Reference to the Commentaries on the OECD Model . Kingston: International Fiscal Association (Canadian Branch), 2005. APPEAL from a judgment of the Federal Court of Appeal (Webb, Near and Locke JJ.A.), 2020 FCA 43 , [2020] 5 C.T.C. 193, 2020 D.T.C. 5021, [2020] F.C.J. No. 204 (QL), 2020 CarswellNat 314 (WL Can.), affirming a decision of Hogan J., 2018 TCC 152 , [2019] 5 C.T.C. 2183, 2018 D.T.C. 1120, [2018] T.C.J. No. 124 (QL), 2018 CarswellNat 4615 (WL Can.). Appeal dismissed, Wagner C.J. and Rowe and Martin JJ. dissenting.

Michael Taylor and Natalie Goulard , for the appellant. Matthew G. Williams and E. Rebecca Potter , for the respondent. The judgment of Abella, Moldaver, Karakatsanis, Côté, Brown and Kasirer JJ. was delivered by Côté J. — TABLE OF CONTENTS Paragraph I. Overview 1 II. Background 11 III. Judicial History 18 A. Tax Court of Canada, 2018 TCC 152 , [2019] 5 C.T.C. 2183 (Hogan J.) 18 B. Federal Court of Appeal, 2020 FCA 43 , [2020] 5 C.T.C. 193 (Webb, Near and Locke JJ.A.) 23 IV. Issues 28 V. Analysis 29 A. General Anti-Avoidance Rule (“GAAR”) 29 B. International Tax Treaties 34

(1) General Principles 34

(2) OECD Commentaries as Interpretative Aids 38 C. Cautionary Preface to the GAAR Analysis 46 D. First Step: Object, Spirit, and Purpose of the Relevant Provisions 50

(1) Residence (Arts. 1 and 4(1)) 52

(2) Carve-Out from Source-Based Capital Gains Tax (“Business Property Exemption” (Art. 13(4) and (5)) 68 E. Second Step: Abusiveness of the Transaction 90 VI. Conclusion 97 I. Overview [ 1 ] The principles of predictability, certainty, and fairness and respect for the right of taxpayers to legitimate tax minimization are the bedrock of tax law. In the context of international tax treaties, respect for negotiated bargains between contracting states is fundamental to ensure tax certainty and predictability and to uphold the principle of pacta sunt servanda , pursuant to which parties to a treaty must keep their sides of the bargain. [ 2 ]

Section 245 of the Income Tax Act , R.S.C. 1985, c. 1 (5th Supp .) (“ Act ”), known as the general anti-avoidance rule (“GAAR”), acts as a legislative limit on tax certainty by barring abusive tax avoidance transactions, including those in which taxpayers seek to obtain treaty benefits that were never intended by the contracting states. This intention is found by going behind the text of the provisions under which a tax benefit is claimed in order to determine their object, spirit, and purpose.

In the bilateral treaty context, there are two sovereign states whose intentions are relevant; a robust analysis must take both into consideration in order to give proper effect to the tax treaty as a carefully negotiated instrument.

[ 3 ] In this case, the appellant, Her Majesty The Queen, as represented by the Minister of National Revenue (“Minister”), submits that the transaction at issue abused 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 , Can. T.S. 2000 No. 22 (“ Treaty ”). According to the Minister, the drafters did not intend the Treaty to benefit residents without “sufficient substantive economic connections” to their state of residence (A.F., at para. 100).

In the view of the respondent, Alta Energy Luxembourg S.A.R.L. (“Alta Luxembourg”), the Minister has failed to discharge her burden of establishing that the object, spirit, or purpose of the provisions was frustrated or defeated. [ 4 ] In my view, the Minister is asking this Court to use the GAAR to change the result, not by interpreting the provisions of the Treaty through a unified textual, contextual, and purposive analysis, but by fundamentally altering the criteria under which a person is entitled to the benefits of the Treaty , thus frustrating the certainty and predictability sought by the drafters. [ 5 ] Tax treaties are replete with choices.

One key choice made by Canada and Luxembourg was to deviate from the Organisation for Economic Co-operation and Development (“OECD”) Model Tax Convention on Income and on Capital (“OECD Model Treaty ”) [1] by including a specific carve-out provision for immovable property, also called the business property exemption. This carve- out allocates to a person’s residence state the right to tax capital gains realized on the disposition of shares or other similar interests deriving their value principally from immovable property used in a corporation’s business.

The rationale of the carve-out is not connected to the theory of economic allegiance. In fact, this provision is a clear departure from this theory, for the source state normally has the greater economic claim to tax income derived from immovable property or a business situated within its territory. [ 6 ] Canada’s decision to forego its right to tax such capital gains realized in Canada was based on economic considerations broader than generating tax revenues.

Tax law is designed not only to bring revenues into a state’s coffers but also to incentivize or disincentivize certain behaviours ( Canada Trustco Mortgage Co. v. Canada , 2005 SCC 54 , [2005] 2 S.C.R. 601, at para. 53 ). Indeed, in agreeing to include the carve-out in the Treaty , Canada sought to encourage investments by Luxembourg residents in business assets embodied in immovable property located in Canada (e.g. mines, hotels, or oil shales) and to reap the ensuing economic benefits.

This incentive was never intended to be limited to Luxembourg residents with “sufficient substantive economic connections” to Luxembourg. Internationally, residency typically does not depend on the existence of such connections; formal criteria for residency are just as well accepted as factual criteria. [ 7 ] In this case, Alta Luxembourg made exactly such an investment.

It is a resident of Luxembourg and, as such, is exempt from Canadian taxes on the capital gain realized on the disposition of shares of its wholly owned Canadian subsidiary. [ 8 ] In my respectful view, my colleagues Rowe and Martin JJ. undertake their analysis as though the Treaty were a simple statute rather than a freely negotiated bargain whose

interpretation must reflect the intentions of the parties that drafted it. Canada understood that it was dealing with a low-tax jurisdiction, and, in recognition of this reality, 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.

This decision can hardly be questioned. [ 9 ] In raising the GAAR, Canada is now seeking to revisit its bargain in order to secure both foreign investments and tax revenues. But if the GAAR is to remain a robust tool, it cannot be used to judicially amend or renegotiate a treaty. [ 10 ] For the reasons that follow, I agree with the courts below that the Minister has not discharged her burden of proving abusive tax avoidance. Therefore, I would dismiss the appeal. II.

Background [ 11 ] In April 2011, Alta Resources LLC, a Texas-based oil and gas firm, and Blackstone Group LP (“Blackstone”), a New York-based private equity firm, founded Alta Energy Partners, LLC, a Delaware limited liability company, for the purpose of acquiring and developing unconventional oil and natural gas properties in North America. One such property was the Duvernay shale formation in northwestern Alberta. Alta Energy Partners Canada Ltd. (“Alta Canada”), a wholly owned Canadian subsidiary of the Delaware limited liability company, was incorporated in order to carry on that business.

Alta Canada invested almost $300 million in its Canadian business through its acquisition of the oil and natural gas drill and recovery rights in certain lands in Alberta. [ 12 ] A restructuring of Alta Canada was undertaken in 2012. As part of the restructuring, Alta Luxembourg was incorporated under the laws of Luxembourg to hold interests in Luxembourg and foreign companies. Prior to the restructuring, Blackstone’s counsel obtained a ruling from the Luxembourg tax authorities that the restructuring was in compliance with tax legislation and administrative policies in Luxembourg.

The shares of Alta Luxembourg were issued to a new Canadian partnership formed in Alberta, Alta Energy Canada Partnership (“Partnership”). On the same day, the Delaware limited liability company sold all of its shares of Alta Canada to Alta Luxembourg. This was a taxable transaction in Canada under the Act , as more than 50 percent of the value of the shares was derived from Canadian resource properties. [ 13 ] In August 2013, Alta Luxembourg agreed to sell its shares of Alta Canada to Chevron Canada Ltd.

When the sale closed on September 10, 2013, for $679,712,251.45, Alta Luxembourg realized a capital gain in excess of $380 million on the disposition. Pursuant to a direction to pay, Alta Luxembourg directed its proceeds from the sale (less an amount paid to the Minister) to the Partnership. In exchange, the Partnership issued promissory notes to Alta Luxembourg, which were set off, in part, by an existing interest-free loan and profit-participating loan. In other words, Alta Luxembourg did not receive any of the sale proceeds.

Following the disposition of its shares of Alta Canada, Alta Luxembourg did not conduct any other business or hold any other investments. [ 14 ] All tax was reported. Alta Luxembourg’s capital gain was reported to the Luxembourg tax authorities and was subject to full taxation by them under their domestic laws. [ 15 ] In its Canadian tax return filed for the 2013 taxation year, Alta Luxembourg claimed an exemption from Canadian

tax on the basis that the gain was not included in its “taxable income earned in Canada” under s. 115(1) (

b) of the Act because the shares were “treaty-protected property” under art. 13(4) and (5) of the Treaty .

These provisions create a carve-out for residents of Luxembourg from Canadian tax arising from a capital gain on the alienation of “shares . . . the value of which . . . is derived principally from immovable property situated in [Canada]” and “in which the business of the company . . . was carried on” (art. 13(4) of the Treaty ). [ 16 ] The Minister denied the treaty exemption, and Alta Luxembourg appealed to the Tax Court of Canada. [ 17 ] In their lengthy Statement of Agreed Facts, the parties make important concessions.

First and foremost, the Minister agrees that Alta Luxembourg is a resident of Luxembourg for the purposes of the Treaty . The Minister and Alta Luxembourg also agree that Alta Canada was a “principal business corporation” pursuant to s. 66(15) of the Act , that its shares were taxable Canadian property within the meaning of s. 248(1) of the Act and that the series of restructuring transactions and the sale of the shares of Alta Canada to Chevron were an “avoidance transaction” as defined in s. 245(3) of the Act . III. Judicial History A.

Tax Court of Canada, 2018 TCC 152 , [2019] 5 C.T.C. 2183 (Hogan J.) [ 18 ] Before the Tax Court, the Minister raised two arguments. First, the Minister argued that Alta Canada did not carry on business in the immovable property in question, such that the business property exemption in art. 13(4) of the Treaty did not apply.

In the alternative, if the shares did qualify as treaty-protected property, the Minister argued that the GAAR should apply. [ 19 ] Hogan J. found that Alta Canada carried on business in the immovable property; therefore, the carve-out in art. 13(4) applied, and Alta Canada’s shares were treaty-protected property for the purposes of the Act . With respect to the GAAR, the parties agreed that the restructuring was an avoidance transaction that resulted in a tax benefit.

Thus, the Tax Court had to determine if the GAAR applied, that is, whether the avoidance transaction resulted in a misuse or abuse of the provisions of the Act or the Treaty . [ 20 ] With respect to the abuse analysis under the GAAR, Hogan J. held that the avoidance transaction did not result in an abuse of ss. 2(3) , 38 , 39 , 115(1) (

b) and 248(1) of the Act , or of the Act as a whole. In his view, the provisions of the Act had operated in the manner intended by Parliament. Without citing this Court’s decision in Canada Trustco , Hogan J. followed the two-step approach it established, acknowledging that a tax treaty, as an international convention, should be given a liberal

interpretation with a view to implementing the true intention of the parties. [ 21 ] Hogan J. conducted a textual, contextual, and purposive analysis of arts. 1, 4 and 13 of the Treaty and held that their rationale is “to exempt residents of Luxembourg from Canadian taxation where there is an investment in immovable property used in a business” (para. 100). He relied in part on the 2017 OECD Model Treaty , on which the Treaty is modeled, and its Commentaries as interpretive aids.

He observed that the business property exemption in art. 13(4) of the Treaty does not exist in the OECD Model Treaty , which demonstrates an intention to depart from the Model Treaty in order to attract foreign investment in business property situated in Canada. Despite the Minister’s objections, Hogan J. found nothing improper about Alta Luxembourg, a single-purpose holding corporation resident in Luxembourg, availing itself of the benefits of the Treaty .

In his view, the Minister was seeking to achieve through the courts the same result with the GAAR as was intended by the Minister of Finance’s proposed rule against tax treaty shopping, but the GAAR could not be used in this way. [ 22 ] Hogan J. held that the overall result of the transaction was not contrary to the rationale of arts. 1, 4 and 13 because the “significant investments of [Alta Luxembourg] to de-risk the Duvernay shale constitute an investment in immovable property used in a business” (para. 100).

Therefore, the GAAR did not preclude Alta Luxembourg from claiming the exemption provided for in art. 13(5) of the Treaty , and the matter was referred back to the Minister for reconsideration and reassessment. B. Federal Court of Appeal, 2020 FCA 43 , [2020] 5 C.T.C. 193 (Webb, Near and Locke JJ.A.) [ 23 ] The Minister did not appeal the Tax Court’s finding that Alta Luxembourg satisfied the requirements for the business property exemption.

Thus, the sole issue before the Federal Court of Appeal was whether the GAAR applied because of an abuse of the Act or the Treaty . [ 24 ] Webb J.A., writing for a unanimous court, dismissed the appeal. In his analysis of the object, spirit, and purpose of the relevant provisions, Webb J.A. noted that most of the Minister’s submissions were in reference to general principles and failed to identify any clear rationale for the provisions at issue: arts. 1, 4 and 13(4) of the Treaty . Relying on R. v.

MIL (Investments) S.A. , 2007 FCA 236 , [2007] 4 C.T.C. 235, Webb J.A. concluded “that the object, spirit and purpose of the relevant provisions of the [ Treaty ] is reflected in the words as chosen by Canada and Luxembourg. Since the provisions operated as they were intended to operate, there was no abuse” (para. 80).

He also determined that Commentaries on the OECD Model Treaty published subsequently to the signature and ratification of the Treaty were “of little assistance in determining the rationale for the exemption” (para. 36). [ 25 ] In addition to finding that the Minister had failed to identify any clear rationale for arts. 1, 4 and 13(4) of the Treaty , Webb J.A. found that the Minister’s five further submissions did not withstand scrutiny, as they all added qualifications to or modified the words of the Treaty .

The Minister’s submissions changed the identity of who would qualify for the exemption from “residents” to “investors” and added the qualification that an “entity” had to have the potential to earn income in Luxembourg in order to be considered a resident of Luxembourg. In Webb J.A.’s view, the fact that the net effect of the profit-participating loan was that Alta Luxembourg never realized taxable income in Luxembourg “is a matter for the Luxembourg tax authorities” (para. 57).

Additionally, there was no underlying requirement that the exemption benefit only persons with commercial or economic ties to Luxembourg, nor was the residence of the partners of Alta Luxembourg’s sole shareholder relevant to the analysis. He found that these qualifications were not included in the exemption in the Treaty , even though they could easily have been added. [ 26 ] Webb J.A. declined to find that treaty shopping is abusive, agreeing with the Tax Court judge in MIL (Investments) S.A. v.

R. , 2006 TCC 460 , [2006] 5 C.T.C. 2552 (“ MIL (TCC)”), at para. 69, that “[t]here is nothing inherently proper or improper with selecting one foreign regime over another” and that, though “the selection of a low tax jurisdiction may speak persuasively as evidence of

a tax purpose for an alleged avoidance transaction, . . . the shopping or selection of a treaty to minimize tax on its own cannot be viewedas being abusive”. [27] In short, Webb J.A. found that “the object, spirit and purpose of the relevant provisions of the [Treaty] is reflected inthe words as chosen by Canada and Luxembourg. Since the provisions [had] operated as they were intended to operate, there was noabuse” (para. 80). The appeal was therefore dismissed. IV.

Issues [28] The Minister has accepted that Alta Luxembourg is a resident of Luxembourg for the purposes of the Treaty and thata business was being carried on in the immovable property in question. Furthermore, Alta Luxembourg has admitted the existence of atax benefit and an avoidance transaction. Therefore, the only element in dispute is the abusive nature of the transaction, which raises thefollowing issues:

a) What are the object, spirit, and purpose of the relevant provisions of the Treaty?

b) Did the courts below err in concluding that the avoidance transaction in this case did not result in an abuse of those provisions? V. Analysis A. General Anti-Avoidance Rule (“GAAR”) [29] Like all statutes, tax legislation must be interpreted by conducting a “textual, contextual and purposive analysis tofind a meaning that is harmonious with the Act as a whole” (Canada Trustco, at para. 10). However, where tax provisions are draftedwith “particularity and detail”, a largely textual

interpretation is appropriate in light of the well-accepted Duke of Westminster principlethat “taxpayers are entitled to arrange their affairs to minimize the amount of tax payable” (Canada Trustco, at para. 11, citingCommissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)). This principle, derived from the rule of law, has beendeemed the “foundation stone of Canadian law on tax avoidance” (B. J. Arnold, “Reflections on the Relationship Between StatutoryInterpretation and Tax Avoidance” (2001), 49 Can.

Tax J. 1, at p. 3). [30] This established principle was affected by the enactment of s. 245 of the Act, also known as the GAAR, which“superimposed a prohibition on abusive tax avoidance, with the effect that the literal application of provisions of the Act may be seen asabusive in light of their context and purpose” (Canada Trustco, at para. 1). Thus, if the Minister can establish abusive tax avoidanceunder the GAAR, s. 245 of the Act will apply to deny the tax benefit even where the tax arrangements are consistent with a literalinterpretation of the relevant provisions (Copthorne Holdings Ltd. v.

Canada, 2011 SCC 63, [2011] 3 S.C.R. 721, at para. 66). TheGAAR applies both to the abuse of provisions found in the Act and to the abuse of provisions found in a tax treaty (s. 245(4)(a)(

i) and (iv)of the Act; s. 4.1 of the Income Tax Conventions

Interpretation Act, R.S.C. 1985, c. I-4). [31] Applying the GAAR involves a three-part process meant to determine: (1) whether there is a tax benefit arising froma transaction; (2) whether the transaction is an avoidance transaction; and (3) whether the avoidance transaction is abusive (CanadaTrustco, at para. 17). As mentioned above, the third

part is the only one in issue before this Court. To determine whether a transaction isabusive, this Court has set out a two-step inquiry (Canada Trustco, at paras. 44 and 55). Under the first step, the provisions relied on forthe tax benefit are interpreted to determine their object, spirit, and purpose.

The second step is to undertake a factual analysis todetermine whether the avoidance transaction at issue is consistent with or frustrates the object, spirit, and purpose of the provisions. [32] The onus rests on the Minister to demonstrate the object, spirit, and purpose of the relevant provisions and toestablish that allowing Alta Luxembourg the benefit of the exemption would be a misuse or an abuse of the provisions (Canada Trustco,at para. 65).

Abusive tax avoidance occurs “when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve anoutcome that those provisions seek to prevent” or when a transaction “defeats the underlying rationale of the provisions that are reliedupon” (Canada Trustco, at paras. 45; see also para. 57; Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3, at para. 40).

Abusive taxavoidance can also occur when an arrangement “circumvents the application of certain provisions, such as specific anti-avoidance rules,in a manner that frustrates or defeats the object, spirit or purpose of those provisions” (para. 45). [33] Canada Trustco recognized that the line between legitimate tax minimization and abusive tax avoidance is “far frombright” (para. 16). As a result, “[i]f the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer”(Canada Trustco, at para. 66; see also Copthorne, at para. 72). B. International Tax Treaties

(1) General Principles [34] In R. v. Melford Developments Inc., (SCC), [1982] 2 S.C.R. 504, at p. 513, this Court applied theprinciple that tax treaties do not themselves levy new taxes, they simply authorize the contracting parties to do so. Reciprocity is afundamental principle underlying tax treaties, as they confer rights and impose obligations on each of the contracting states.

Hogan J.observed that “[p]arties to a tax treaty are presumed to know the other country’s tax system when they negotiate a tax treaty; they arepresumed to know the tax consequences of a tax treaty when they negotiate amendments to that treaty” (para. 84). This only makessense. [35] The objective of tax treaties, broadly stated, is to govern the interactions between national tax laws in order tofacilitate cross-border trade and investment. One of the most important operational goals is the elimination of double taxation, where the

same source of income is taxed by two or more states without any relief. If left unchecked, double taxation risks creating barriers tointernational trade and investment, which are vital in a globalized economy. Thus, many substantive provisions of the OECD ModelTreaty, a model for numerous bilateral tax treaties, are directed to achieving this goal and resolving conflicting claims betweenresidence-based taxation and source-based taxation. [36] Another important consideration is the dual nature — contractual and statutory — of tax treaties.

Consideration ofthe contractual element is crucial to the application of the GAAR because it focuses the analysis on whether the particular tax planningstrategy is consistent with the compromises reached by the contracting states. As noted by international tax law scholars Jinyan Li andArthur Cockfield: Whether the particular outcome of tax planning is defensible may depend on the understanding of the “bargain” struck by the two treatypartner countries.

Every dispute involving the application of a tax treaty needs to ask the question of whether and how one treaty partnercan dispute or should be allowed to upset the “bargain” struck in its own national interest that inheres in the treaty “contract”. Despite theoffence that one treaty partner may take, in retrospect, to how a treaty provision is applied, the question remains: Might the particularoutcome be one that the other treaty partner foresaw or reflect the “contractual intention” of the other treaty partner? After all, the“bargain” was entered into by the parties out of mutual self-interest.

This is particularly relevant in applying general anti-avoidance rules.[Emphasis added.] (J. Li and A. Cockfield, with J. S. Wilkie, International Taxation in Canada: Principles and Practices (4th ed. 2018), at p. 376) [37] As tax treaties are treaties, their

interpretation is governed by the Vienna Convention on the Law of Treaties, Can.T.S. 1980 No. 37 (“Vienna Convention”), but the methodology prescribed is not radically different from the modern principle applicableto domestic statutes in Canada — that is, one must consider the ordinary meaning of the text in its context and in light of its purpose(art. 31(1) of the Vienna Convention; Crown Forest Industries Ltd. v. Canada, (SCC), [1995] 2 S.C.R. 802, at para. 43;Stubart Investments Ltd. v. The Queen, (SCC), [1984] 1 S.C.R. 536, at p. 578).

However, unlike statutes, treaties must beinterpreted “with a view to implementing the true intentions of the parties” (J. N. Gladden Estate v. The Queen, (FC),[1985] 1 C.T.C. 163 (F.C.T.D.), at p. 166, quoted approvingly in Crown Forest, at para. 43). The national self-interest of eachcontracting state must be reconciled in the interpretive process in order to give full effect to the bargain codified by the treaty. Thisprinciple applies with equal force where a court is engaged in the process of ascertaining a treaty’s “object, spirit, and purpose” as part ofthe GAAR framework.

(2) OECD Commentaries as Interpretative Aids [38]

Article 31 of the Vienna Convention permits courts to consider contextual factors such as other agreements andinstruments made by parties in connection with a treaty. In my view, the OECD Model Treaty and its Commentaries are relevant to theinterpretation of treaties based on that model. The introduction to the OECD Model Treaty indicates that the Commentaries “can . . . beof great assistance in the application and

interpretation of the conventions and, in particular, in the settlement of any disputes”, and thisCourt has affirmed the “high persuasive value” of the OECD Model Treaty and its Commentaries (“Introduction” to the OECD ModelTreaty (1998, 2003 and 2017), at para. 29; Crown Forest, at para. 55; see also D. A. Ward, “Principles To Be Applied in InterpretingTax Treaties” (1977), 25 Can. Tax J. 263, at p. 268).

However, the relevance of Commentaries released subsequent to the signing of atreaty is disputed (see, e.g., “Introduction” to the OECD Model Treaty (1998, 2003 and 2017), at para. 35; MIL (TCC), at para. 83; CuddPressure Control Inc. v.

R., (FCA), [1999] 1 C.T.C. 1 (F.C.A.), at para. 28, per McDonald J.A.; SA Andritz,No. 233894, Conseil d’État (Section du Contentieux), December 30, 2003 (France); Li and Cockfield, at p. 57). [39] In the instant case, the Minister relies on revisions to the Commentaries on the OECD Model Treaty that werepublished in 2003 and 2017, several years after Canada and Luxembourg negotiated the Treaty. In the 2003 Commentaries, treatyshopping is characterized as an abuse of the concept of residence, whereas previous Commentaries published at the time the Treaty wassigned were silent on this question.

A revision to the 2017 Commentaries, made in connection with the addition of a new art. 29 to theOECD Model Treaty, provides that legal residency alone is not an automatic entitlement to all benefits under a tax treaty. [40] While revisions to the Commentaries are relevant to tax treaty

interpretation, the key issue is the weight that theyshould receive. Although some scholars submit that the OECD has a tendency of revising the Commentaries too often and toodramatically, thereby sometimes diverging from the original intentions of the parties, I am not prepared to reject all subsequentCommentaries as interpretative aids (see Li and Cockfield, at p. 57; P. Malherbe, Elements of International Income Taxation (2015), atpp. 49-50). I instead prefer the nuanced approach adopted by the Federal Court of Appeal in Prévost Car Inc. v.

Canada, 2009 FCA 57,[2010] 2 F.C.R. 65. [41] Indeed, in Prévost Car, the Federal Court of Appeal held that subsequent Commentaries expanding or clarifyingnotions already captured by the OECD Model Treaty are relevant, but not those that extend the scope of provisions in a manner thatcould not have been considered by the drafters (paras. 10-12; see also Li and Cockfield, at p. 57).

Thus, while later amendments to theCommentaries are not part of the context as defined in art. 31(2) of the Vienna Convention, given that such amendments were not made“in connexion with the conclusion of the treaty”, they may play a role under art. 31(3), which refers to “[a]ny subsequent agreementbetween the parties regarding the

interpretation of the treaty or the application of its provisions” and “[a]ny subsequent practice in theapplication of the treaty which establishes the agreement of the parties regarding its

interpretation”. [42] In this case, I am of the view that the 2003 and 2017 Commentaries do not reflect the intentions of the drafters of theTreaty. The extensive revisions made to the Commentaries in 2003 purported to clarify the relationship between tax treaties and domesticanti-avoidance rules, and, in particular, one of the revisions was made to include the prevention of tax avoidance as a purpose of suchtreaties.

The changes were not mere clarifications and have been described as being “created out of thin air by the OECD in 2003” and as“a significant change in the stated attitude of the OECD to the relationship between tax treaties and tax avoidance” (B. J. Arnold, “TaxTreaties and Tax Avoidance: The 2003 Revisions to the Commentary to the OECD Model” (2004), 58 I.B.F.D. Bulletin 244, at pp. 249

and 260). [ 43 ] Using the Federal Court of Appeal’s language in Prévost Car (at para. 12), the 2003 Commentaries do not elicit, but rather contradict, the views previously expressed. When Canada and Luxembourg signed the Treaty in 1999, the applicable Commentaries indicated that anti-abuse measures, to be effective, had to be included in a treaty (“Commentary on

Article 1” of the 1998 OECD Model Treaty , at para. 21). Further, they referred to the principle of pacta sunt servanda , which supports the position that where nothing in a treaty speaks directly to fiscal avoidance, there is a strong argument that the treaty partners negotiated the treaty not intending such rules to apply (“Commentary on

Article 1” of the 1998 OECD Model Treaty , at paras. 11-26; D. A. Ward et al., The

Interpretation of Income Tax Treaties with Particular Reference to the Commentaries on the OECD Model (2005), at pp. 91-92). [ 44 ] Moreover, interpreting art. 1 of the Treaty with reference to the 2003 Commentaries would overlook Luxembourg’s registered observation on the “Commentary on

Article 1” of the 2003 OECD Model Treaty . That observation reads as follows: Luxembourg does not share the

interpretation in paragraphs 9.2, 22.1 and 23 which provide that there is generally no conflict between anti-abuse provisions of the domestic law of a Contracting State and the provisions of its tax conventions. Absent an express provision in the Convention, Luxembourg therefore believes that a State can only apply its domestic anti-abuse provisions in specific cases after recourse to the mutual agreement procedure. [para. 27.6] In effect, even if the Minister were able to rely on the Commentaries postdating the Treaty , they would be of no assistance because Luxembourg’s observation expresses disagreement with the “Commentary on

Article 1” of the OECD Model Treaty , which includes the anti-abuse commentary (Ward et al., at p. 64; “Commentary on

Article 1” of the 2003 OECD Model Treaty , at p. 7). [ 45 ] It follows, then, that in the

interpretation of art. 1 of the Treaty , Commentaries on art. 1 of the OECD Model Treaty that postdate the Treaty cannot be relied on to introduce terms that modify the Treaty . Not only would this effectively amend the Treaty in a manner not agreed upon by the parties, but it would also usurp the role of the Governor in Council by allowing for judicial amendment of bilateral treaties against the expressed wishes of the contracting states. C.

Cautionary Preface to the GAAR Analysis [ 46 ] Before I proceed, it is important to sound some notes of caution. [ 47 ] First and foremost, tax avoidance is not tax evasion, and there is no suggestion by either party that the transaction in this case was evasive. In addition, tax avoidance should not be conflated with abuse.

Even if a transaction was designed for a tax avoidance purpose and not for a bona fide non-tax purpose, such as an economic or commercial purpose, it does not mean that it is necessarily abusive within the meaning of the GAAR ( Canada Trustco , at paras. 36 and 57; see also Lipson , at para. 38 ). The purpose of a transaction is relevant mainly to characterize it as either an avoidance transaction or a bona fide transaction and, specifically, to assess the abusive nature of the transaction.

In their factual analysis, courts may consider whether an avoidance transaction was “motivated by any economic, commercial, family or other non-tax purpose” ( Canada Trustco , at para. 58). However, a finding that a bona fide non-tax purpose is lacking, taken alone, should not be considered conclusive evidence of abusive tax avoidance. Justices Rowe and Martin are taking exactly that approach, and it colours their entire analysis. Moreover, such a finding should not be allowed to impair the proper

interpretation of the relevant provisions in a manner that makes substantive economic connections or the presence of a bona fide non-tax purpose a condition precedent to every tax benefit; the goal is to ensure the relevant provisions are properly interpreted in light of their context and purpose ( Canada Trustco , at para. 62). [ 48 ] Second, it is also important to distinguish what is immoral from what is abusive.

It is true, as reiterated in Copthorne , that the GAAR is a legislative measure by which “Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer” (para. 66). But, in Copthorne , Rothstein J. was quick to note the limits to that legislative mandate.

In contrast to what my colleagues are proposing, Rothstein J. observed that courts should not infuse the abuse analysis with “a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do” (para. 70). Taxpayers are allowed to minimize their tax liability to the full extent of the law and to engage in “creative” tax avoidance planning, insofar as it is not abusive within the meaning of the GAAR (para. 65).

Therefore, even though one may consider treaty shopping in tax havens to be immoral, this is not determinative of a finding of abuse. [ 49 ] Finally, the abuse analysis is not meant to be a “search for an overriding policy of the Act that is not based on a unified, textual, contextual and purposive

interpretation of the specific provisions in issue” ( Canada Trustco , at para. 41). The focus of the

interpretation is on the object, spirit, and purpose of the specific provisions and not on the broader policy objective of the Act or of a particular tax treaty. Therefore, policy objectives such as “avoiding double taxation” and “encouraging trade and investment” that are found in bilateral tax treaties cannot be invoked to override the wording of the provisions in issue. D. First Step: Object, Spirit, and Purpose of the Relevant Provisions [ 50 ] As mentioned above, the first step of the abuse analysis is to ascertain the object, spirit, and purpose of the relevant provisions. Because this is a question of treaty

interpretation, however, this must be done with a view to implementing the true intentions of the parties. This is a question of law and the analysis of this first step is therefore subject to the correctness standard ( Canada Trustco , at para. 44). [ 51 ] The Minister’s submissions centre on an alleged abuse by Alta Luxembourg of arts. 1, 4(1) and 13(4) and (5) of the Treaty . I analyze these provisions in two separate groups for the purposes of the first step: first, arts. 1 and 4(1), which pertain to resident status; and second, art. 13(4) and (5), under which the right to tax the capital gain at issue is allocated to the residence state.

(1) Residence (Arts. 1 and 4(1)) [ 52 ] Residence is at the core of bilateral tax treaties, given that access to treaty benefits is normally reserved to persons residing in one or both of the contracting states. The text of arts. 1 and 4(1) of the Treaty also makes residence central to the application

of the Treaty. Indeed, the residency requirement established in art. 1 of the Treaty is modeled on the OECD Model Treaty: This Convention shall apply to persons who are residents of one or both of the Contracting States. [53] Article 4(1) elaborates on the definition of “residence” under the Treaty: For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, isliable to tax therein by reason of that person’s domicile, residence, place of management or any other criterion of a similar nature.

Thisterm also includes a Contracting State or a political subdivision or local authority thereof or any agency or instrumentality of any suchState, subdivision or authority. This term, however, does not include any person who is liable to tax in that State in respect only ofincome from sources in that State.

According to this provision, a resident under the Treaty is a person who is liable to tax in one or both of the contracting states (Canadaand Luxembourg) by reason of one of the connecting factors listed (i.e. domicile, residence, place of management or another similarcriterion) (see Crown Forest, at paras. 23-25). I also note that the use of the word “means” in this provision indicates that the

definitionshould be “construed as comprehending that which is specifically described or defined” and thus as setting out all requirements that mustbe met to be considered a resident under the Treaty (R. v. Hauser, (SCC), [1979] 1 S.C.R. 984, at p. 1009, perDickson J.; see also R. v.

McLeod (1950), (BC CA), 97 C.C.C. 366 (B.C.C.A.), at pp. 371-72, quoting Dilworth v.Commissioner of Stamps, [1899] A.C. 99 (P.C.), at pp. 105-6). [54] In the context of corporations, the “liable to tax” requirement is met under the Treaty where the domestic law of acontracting state exposes the corporation to full tax liability on its worldwide income because it has its residence in that state (see CrownForest, at paras. 40 and 45).

Liability to full taxation is established by the nexus between that State and the corporation’s resident status.The “liable to tax” requirement is often described in terms that may perhaps appear misleading, such as “comprehensive taxation” or“full liability to tax”. These terms convey the idea that residents enjoying tax holidays may be more suspicious than others. In reality,this requirement is not concerned with whether the person claiming benefits is in fact subject to taxation.

Being liable to tax is betterunderstood as being “liable to be liable to tax”, meaning that taxes are a possibility, regardless of whether the person actually pays any(R. Couzin, Corporate Residence and International Taxation (2002), at p. 107; see also pp. 106 and 111). Therefore, corporate residentsenjoying certain tax holidays, for example on capital gains, do not automatically lose their resident status under the Treaty because theyare not subject to every possible form of taxation (Couzin, at pp. 110-11 and 150).

This can be contrasted with fiscally transparentvehicles like partnerships that are not exempted from taxation but, rather, are not exposed to tax at all, as their income is taxed in thepartners’ hands instead. [55] Aside from the “liable to tax” requirement, the purpose of art. 4(1) is not to establish specific standards for definingresidence. This provision expressly states that residence is to be defined by the laws of the contracting state of which the person claims tobe a resident.

This provision of the Treaty is modeled almost word for word on art. 4(1) of the 1998 OECD Model Treaty, whoseCommentary also made it clear that the intention was to leave the core definition of residence to domestic law, not to bilateral taxtreaties: Conventions for the avoidance of double taxation do not normally concern themselves with the domestic laws of the Contracting Stateslaying down the conditions under which a person is to be treated fiscally as “resident” and, consequently, is fully liable to tax in thatState.

They do not lay down standards which the provisions of the domestic laws on “residence” have to fulfil in order that claims forfull tax liability can be accepted between the Contracting States. In this respect the States take their stand entirely on the domestic laws.[Emphasis added.] (“Commentary on

Article 4” of the 1998 OECD Model Treaty, at para. 4) [56] Consideration of the context of the Treaty confirms this intention expressed in the Commentary. Indeed, thispreference for leaving the meaning of residence to domestic law is totally consistent with the scheme of the Treaty. Most terms found inthe Treaty are defined under domestic law and not by the Treaty itself.

As emphasized by Professor Arnold, “[b]ecause the language oftax treaties is broad and general, it seems inevitable that recourse must be had to the domestic laws of the contracting states in order toprovide flesh for the bare bones of the treaty” (B. J. Arnold, Reforming Canada’s International Tax System: Toward Coherence andSimplicity (2009), at p. 325). Although the Treaty does define residence in art. 4 and some other terms in arts. 3(1), 5, and 6(2), thesedefinitions are far from exhaustive.

In fact, the list of defined terms is rather scant, and important concepts, such as “business” and“profits”, take their meaning directly from domestic law.

The importance of domestic law as a source of substantive content for theapplication of the Treaty is expressly spelled out in art. 3(2): As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the contextotherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which theConvention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other lawsof that State. [57] Despite the clear pronouncement made in the Commentary above and the well-established preference for leavingimportant

definitions to domestic law, and despite her admission that Alta Luxembourg is a resident of Luxembourg, the Minister arguesthat meeting the definition of resident under domestic law is not sufficient to qualify as a resident under the Treaty. According to theMinister, the benefits of the Treaty “are intended to be available only to persons who have sufficient substantive economic connections”to their state of residence (A.F., at para. 100 (emphasis added)).

Mere formalistic or legal attachment to their state of residence wouldthus be insufficient. [58] It is worth noting that the words “sufficient substantive economic connections” are conspicuous by their absence inthe text of both arts. 1 and 4. Although the GAAR invites courts to go beyond the text to understand the object, spirit, and purpose of theprovisions, there are limits to this exercise, especially when attempting to discern the intent of bilateral treaty partners. In the face of a

complete absence of express words, the inclusion of an unexpressed condition must be approached with circumspection. It must be remembered that the text also plays an important role in ascertaining the purpose of a provision. The proper approach is one that unifies the text, context, and purpose, not a purposive one in search of a vague policy objective disconnected from the text ( Canada Trustco , at para. 41) . [ 59 ] Nonetheless, I acknowledge that treaty partners do not have the unfettered liberty to alter or redefine residence as they wish for the purposes of a tax treaty.

The broader context of international tax law and the law of treaties helps to understand what was within the contemplation of Canada and Luxembourg when they drafted arts. 1 and 4(1) of the Treaty . Pursuant to the principle of pacta sunt servanda , parties to a treaty must keep their sides of the bargain and perform their obligations in good faith ( art. 26 of the Vienna Convention ) . Domestic law

definitions of residence should therefore broadly correspond to international norms and not have the effect of redefining residence in a way “ that takes the words unmistakably past their accepted usage ” (Couzin, at p. 136), including the

definitions of residence that were in effect in the two states at the time the Treaty was drafted. [ 60 ] I pause here to observe that the definition of residence in Luxembourg law is consistent with international practice.

Broadly speaking, there are two internationally recognized methods used to determine corporate residency: (1) the “place of incorporation” or “legal seat” rule, pursuant to which residence is determined by a purely formal criterion, that is, where the corporation was incorporated or has its legal seat; and (2) the “real seat” rule, pursuant to which residence depends on a combination of factual factors aimed at identifying the corporation’s place of effective management (R. S. Avi-Yonah, N. Sartori and O. Marian, Global Perspectives on Income Taxation Law (2011), at p. 130, quoting M. A. Kane and E. B.

Rock, “Corporate Taxation and International Charter Competition” (2008), 106 Mich. L. Rev. 1229, at p. 1235). Luxembourg law grants resident status to corporations having either their legal seat or their central management in Luxembourg — two criteria consistent with these methods (Statement of Agreed Facts, A.R., vol. II, at p. 28, para. 122; Opinion on the Luxembourg tax residence of the company, A.R., vol. VII, at pp. 5 and 7, paras. 7.2 and 8.2.1). In the instant case, the parties agree that Alta Luxembourg is a resident of Luxembourg as its legal seat is located there (Statement of Agreed Facts, A.R., vol.

II, at p. 28, para. 122). [ 61 ] Interestingly, the “sufficient substantive economic connections” rationale put forward by the Minister bears similarities to the “real seat” rule emphasizing substance over form and seemingly rejects a formal, legalistic rule like the “place of incorporation” or “legal seat” rule. Thus, I understand the Minister’s submissions as suggesting that establishing residence merely on the basis of a formal criterion is insufficient to conform to the spirit of the rules of residence under the Treaty . Something more would be needed: some real connections to the country of residence.

What the Minister’s submissions overlook, however, is that many of the world’s most developed economies — including Canada itself — accept and apply the “place of incorporation” or “legal seat” rule (Avi- Yonah, Sartori and Marian, pp. 130 and 133-34; see s. 250(4) (

a) of the Act ). Although a formal criterion may sometimes be unable to capture the real location of a corporation’s economic activities, it nevertheless became widespread internationally because of its certainty and simplicity, considerations that are vital to a well-functioning tax system based on the rule of law and the Duke of Westminster principle (Li and Cockfield, at p. 77). Hence, the definition in Luxembourg law does not depart from accepted usage such t

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