Stanley Foo Law Corporation

Wills & Probate

A recent case involving the General Anti-Avoidance Rule (GAAR) is Canada v Alta Energy Luxembourg 2021 SCC 49. In that case, to cut a long story short, two American firms incorporated a company in Luxembourg, then had that company declare the capital gains tax in Luxembourg. The question was if that transaction was abusive, and, with $380 million of capital gains involved, the federal government and the companies’ high-priced lawyers were willing to take it to the Supreme Court of Canada.

The majority decision reiterated the three-step process for applying GAAR – 1) whether there was a tax benefit from the transaction, 2) whether there was an avoidance transaction, and 3) whether the transaction was abusive. The first two steps would be straight-forward, but the last one would be more difficult, and the court then applied a two-step test to see if a transaction was abusive, namely, a) the sections of the Income Tax Act were to be interpreted to determine their object, spirit, and purpose, and then b) to see if the transaction abused that object, spirit, and purpose.

The majority decision ruled that a party was entitled to manage its affairs to minimize its taxes, and, in this case, it was not engaged in an abusive transaction, so the Canada Revenue Agency lost its appeal. The dissent, however, while agreeing with how GAAR was to be used, said that the companies had no connection to Luxembourg, so they were clearly engaged in an abusive transaction.

I am not familiar with tax treaties, but it seems the majority decision applied the terms of the treaty. Perhaps, under general principles, companies must have a central place of management in a jurisdiction to be taxed there, but the Treaty allows otherwise, so the terms of that Treaty must be upheld.

The important thing, of course, is that the Court stated, again, the process for determining abusive transactions, so the tax community would know what to expect. To paraphrase the famous historian, Santayana, he who forgets the lessons of income tax will be condemned to pay lots of taxes.


As I said, I’m not up on international tax, so don’t take this as legal advice. If you really have that kind of money that you can go treaty shopping, hire an expensive tax specialist. If you have that kind of money, and you don’t need to go treaty shopping but you need a tax lawyer, give me a call.