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International Tax Issues at the Supreme Court of Canada

December 17, 2021

The Supreme Court of Canada (SCC) recently released two important decisions relating to international tax issues. The SCC provided meaningful guidance on the interpretation of one of Canada’s bilateral tax treaties and the application of the general anti-avoidance rule (GAAR) in Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, and clarity on the interpretation of complex tax provisions, such as the “foreign accrual property income” (FAPI) rules, in Canada v. Loblaw Financial Holdings Inc., 2021 SCC 51. These welcome SCC decisions emphasize the importance of the principles of predictability, certainty, fairness and respect for the right of taxpayers to plan their affairs (within the applicable laws) to minimize their tax liabilities.

1. Alta Energy

On November 26, 2021, the SCC released its decision in Canada v. Alta Energy Luxembourg S.A.R.L., marking the first time the SCC addressed the application of the GAAR to so-called “treaty shopping” in the context of one of Canada’s bilateral tax treaties. A majority of the SCC confirmed the established position in Canadian jurisprudence that the GAAR generally will not operate to deny benefits to a taxpayer that qualifies as a resident under an applicable tax treaty. The dispute in this case pre-dates the application of the Multilateral Convention to Implement Tax Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

In a 6:3 decision, the Supreme Court majority (Majority) dismissed the Crown's appeal and held that the GAAR did not apply to deny the tax benefits claimed by the taxpayer, a Luxembourg resident company, under 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).


The case involved the sale of shares of Alta Energy Partners Canada Ltd. (Alta Energy) by its sole shareholder, Alta Energy Luxembourg S.A.R.L. (Alta Luxembourg). Alta Energy held a working interest in several Alberta oil and gas properties and operated an exploration and production business. The shares of Alta Energy derived more than 50 per cent of their value from Canadian resource properties, and were thus “taxable Canadian property”, the disposition of which is generally taxable to non-residents of Canada.

The original structure for holding Alta Energy, under a U.S. LLC, was inefficient from a tax perspective in part because the Canada-U.S. tax treaty did not offer an exemption from Canadian taxation on any gain from the disposition of the Alta Energy shares. In 2012, as part of a restructuring, Alta Luxembourg was formed, and it acquired the Alta Energy shares. The disposition was a taxable transaction under the Act but, at the time of the transfer, the value of the Alta Energy shares equalled their tax cost. As a result, there was no capital gain realized and no Canadian income tax payable. 

The ultimate investors in Alta Energy remained unchanged and had no commercial connection to Luxembourg. The restructuring was designed to access the benefits of the Treaty and, in particular, the Business Property Exemption (described below) on a subsequent disposition of the Alta Energy shares. In 2013, Alta Luxembourg sold the Alta Energy shares and realized a capital gain in excess of C$380-million. Alta Luxembourg took the position that the capital gain was not subject to tax in Canada because of an exemption available under Articles 13(4) and (5) of the Treaty. The Minister denied the Treaty exemption pursuant to the application of the GAAR.

In an agreed statement of facts (following the preparation of a foreign legal opinion on the matter), the parties agreed that Alta Luxembourg was a resident of Luxembourg for the purposes of the Treaty. The parties also agreed that the series of restructuring transactions were an "avoidance transaction" for purposes of the GAAR.

At trial, the Tax Court of Canada (TCC) held that Alta Luxembourg qualified for the exemption from Canadian tax on the capital gain under the Treaty and concluded that the GAAR did not apply to deny the resulting benefit. The Federal Court of Appeal (FCA) upheld the TCC’s decision and concluded the GAAR did not apply to deny the benefit. The FCA held that the provisions of the Treaty had operated as they were intended to operate and, as such, there was no abusive tax avoidance. 

The Treaty Exemption

The Treaty generally assigns the right to tax capital gains to the state in which the taxpayer is resident. However, each state also retains its respective rights to tax capital gains from the disposition of immovable property situated in that particular state or from certain shares (or other interests) that derive their value principally from immovable property situated in that state. Article 13(4) contains an important carve-out from this rule. In effect, it provides that a source state's taxing rights over immovable property situated in that state do not extend to taxing gains on shares whose value is derived principally from immovable property “in which the business of the company… was carried on” (the “Business Property Exemption”). The right to tax shares that qualify for the Business Property Exemption rests exclusively with the taxpayer's state of residence.

The TCC had held that the value of the Alta Energy shares was derived principally from immovable property in which its business was carried on and met the conditions for the Business Property Exemption.  This finding was not appealed by the Crown.

Decision of the Majority

The Majority concluded that Article 13(4) of the Treaty and the Business Property Exemption operated as they were intended, there was no abusive tax avoidance, and the GAAR could not be applied to deny the tax benefit claimed by Alta Luxembourg.

The Majority gave a well-reasoned decision that emphasized the principles of predictability, certainty, fairness and respect for the right of taxpayers to plan their affairs to minimize taxes. The decision also properly calibrated the application of the GAAR to the treaty context – the Majority cautioned that the GAAR should be applied in such a way that maintains the bargain struck by the treaty partners, with the intention of both states being taken “into consideration to give proper effect to the tax treaty as a carefully negotiated instrument”. The Majority characterized the Crown’s position as asking the Court to “fundamentally alter the criteria under which a person is entitled to the benefits of the Treaty” instead of interpreting the provisions of the Treaty as required by the traditional treaty interpretation and GAAR analyses. 

The Majority found that, in entering the Treaty and agreeing to the Business Property Exemption, the Government of Canada specifically preferred the objective of increasing foreign investment, even at the possible expense of maximizing tax revenues in any particular situation. The Majority was critical of the effect of the attempted application of the GAAR in this case, observing that:

The Crown argued that the Treaty should be interpreted based on the theory of economic allegiance under which the provisions of the Treaty allocate taxing rights to the state to which the income and the taxpayer are more closely connected. With respect to the Business Property Exemption in Article 13(4), the Minister argued that such capital gains generally may have closer economic connection to the state of residence (and not the state where the immovable property is situated), but only where the “taxpayer owes economic allegiance [to the residence state], which can be tested by the presence of sufficient substantive economic connections”.

While giving credence to the application of economic allegiance as one principle underlying the allocation of taxing rights in a tax treaty, the Majority recognized several other principles, including capital import neutrality, the prevention of tax base erosion and the attraction of foreign investment. 

The Majority concludes that the Business Property Exemption was agreed to by Canada and Luxembourg as part of the balancing of these competing priorities and that economic allegiance was not the dominating rationale:

The Majority found that (1) the main objective of the Business Property Exemption was to attract foreign investment, (2) Canada agreed to forego its right to tax the capital gains that benefited from the Business Property Exemption “to reap the economic benefits those investments generated” even if such gains would not be taxed in Luxembourg, (3) Canada was alive to the issue of treaty shopping and was aware that Luxembourg was known as an attractive jurisdiction for treaty shopping, and (4) Canada and Luxembourg chose not to include any anti-avoidance provisions in the Treaty that would prevent treaty shopping in this context. 

The Majority concluded that the restructuring transactions to transfer the Alta Energy shares to Alta Luxembourg as a means of accessing the benefit of the Business Property Exemption were not abusive. The Majority held that, as a resident of Luxembourg, Alta Luxembourg qualified for the benefits of the Business Property Exemption. The Majority rejected the Minister’s attempt to infuse the Business Property Exemption with an additional requirement that the resident must have “sufficient substantive economic connections” to be able to take advantage of the Treaty. The fact that Alta Luxembourg paid less tax in Luxembourg than it would have in Canada did not change the conclusion and the Majority held that provisions of the Treaty operated as intended. Indeed, the Majority described the ability for corporations such as Alta Luxembourg to take advantage of the carve-out as "tax planning outcomes consistent with the bargain struck between Canada and Luxembourg".

The Majority also explicitly rejected the Minister’s implication that “treaty shopping arrangements are inherently abusive” and noted that such a broad assertion is not consistent with a proper GAAR analysis. The Majority found support for its position from the fact that the Treaty has specific provisions denying benefits to certain kinds of tax-preferred Luxembourg holding companies (i.e., “1929 holding companies”) which did not apply to Alta Luxembourg. This suggested to the Majority that the two jurisdictions specifically turned their attention to the classes of residents for whom it would be inappropriate to grant Treaty benefits, making it harder to conclude that it was abusive for Alta Luxembourg (which was not caught by those specific anti-avoidance rules) to be granted Treaty benefits. We would suggest that this should not limit the general application of the reasoning of the Majority to other treaties that lack such specific anti-avoidance rules. There is undoubtedly ample evidence that Canada and other relevant jurisdictions were aware of so-called “treaty shopping” concerns at the time of entering into such other treaties and yet chose to rely on the residence standard as the main qualifying criterion for treaty benefits.

Dissenting Decision

The reasons of the three-member minority of the Court (Minority) are also of great interest, even though they do not constitute binding judicial precedent. The Minority concludes that the restructuring transactions were abusive and the GAAR should have applied to deny the benefits of the Treaty to Alta Luxembourg. 

In their analysis of the purpose of the relevant provisions of the Treaty, the Minority appear to rely on the principle of economic allegiance as the main rationale underlying the assignment of taxing rights, with the right to tax being held by the state with the stronger economic claim to the income. The Minority accepted the Crown’s argument that the need for economic ties to Luxembourg underpinned the object, spirit, or purpose of the relevant provisions of the Treaty, which underlies the application of the GAAR. The Minority found that Alta Luxembourg did not carry on business in Luxembourg, had no genuine presence in Luxembourg (as it was created and controlled by the ultimate U.S. and foreign shareholders), and the transaction was structured specifically to ensure no gain would be realized in Luxembourg.

The Minority did, however, confirm that treaty shopping per se, being “the minimizing [of] tax liability by selecting a beneficial tax regime in making an investment in a foreign jurisdiction,” is not inherently abusive and, in certain circumstances, the selection of a treaty to minimize tax “may be consonant with one of the main purposes of tax treaties: encouraging trade and investment”. This general principle appears, in the Minority’s view, to be limited to only those circumstances where there is a “genuine economic connection with the state of residence”. 

Implications of the MLI on treaty shopping cases in the future

Both Canada and Luxembourg are signatories to the MLI, which introduces a new statement of purpose for Canada's tax treaties as well as the principal purpose test (PPT), both specifically targeting tax treaty abuse. The PPT is a new tool for the Canadian tax authorities to deny tax benefits realized under Canada's (affected) tax treaties. The PPT provides that a benefit otherwise provided under Canada's treaties modified by the MLI will be denied "if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the [treaty] ".

The PPT may be seen as imposing an additional requirement on the taxpayer to prove that obtaining a tax treaty benefit was not a primary purpose of its transaction(s) or that the benefit accorded with the object and purpose of the relevant treaty provisions – or at least to defend against assertions to the contrary. While the concept of the "object and purpose" of the relevant provisions is central to both the PPT and the GAAR, it remains to be seen how the application of the PPT will be litigated (as the application of the MLI, and the PPT in particular, is yet to be considered by the courts).

The decision in the Alta Energy case may not provide much direct assistance in interpreting the MLI. For one, the MLI is largely unaddressed in the Majority decision. In addition, the “bargain” between Canada and Luxembourg was updated on the entering into of the MLI and it was this concept of preserving the negotiated bargain between the countries that was central to the Majority’s decision.

2. Loblaw Financial 

On December 3, 2021, the SCC released Canada v. Loblaw Financial Holdings Inc., in which the Court sided with the taxpayer and dismissed the Crown’s appeal of the FCA decision (for background, please see our Blakes Bulletin on the FCA decision). In so doing, the SCC provided meaningful guidance as to how one should interpret complex tax provisions such as the foreign affiliate provisions which were the subject of the Loblaw Financial case. In order that taxpayers may be able to govern their affairs with the appropriate degree of certainty as to the application of tax rules, the SCC emphasized the importance of giving full effect to the words of a provision where they were clear and unequivocal. 

The case involved almost C$475-million of income earned in 2001-2010 by Glenhuron Bank Limited (Glenhuron), a wholly-owned Barbados bank subsidiary of the taxpayer (Loblaw). The Crown had contended that such income was FAPI that should be taxed in the hands of the taxpayer on a current basis, as Glenhuron was a controlled foreign affiliate of Loblaw. The specific issue before the SCC was whether Glenhuron’s income qualified for a specific exception in the FAPI regime as income earned by qualifying foreign financial institutions. 

The SCC decision provides welcome guidance specifically on the meaning of “conducting” business and, more generally, on the role of legislative intention in statutory interpretation.


Glenhuron was a Barbados-resident corporation that was licensed and regulated in Barbados as an international bank. Its principal activities included investing in short-term debt securities, cross-currency swaps and interest swaps. Most of Glenhuron’s funds were obtained by way of equity capital invested by members of the Loblaw group. Glenhuron did not take deposits or otherwise obtain funding from arm’s length persons.

The key issue in the case turned on whether Glenhuron’s income from the above activities was considered to be from an “investment business”, as defined in subsection 95(1) of the Act, in which case such income would be included in FAPI. Specifically, the issue was whether Glenhuron met an exception from the “investment business” definition for qualifying foreign financial institutions (the “Financial Institution Exception”) which exception required (among other things) Glenhuron’s business to be conducted principally with arm’s length persons.

Tax Court Decision

The TCC concluded that Glenhuron’s income was FAPI on the basis that such income did not qualify for the Financial Institution Exception. Of particular significance to the subsequent appeals, the TCC found that the income from the activities carried on by Glenhuron was earned in a business conducted principally with non-arm’s length persons, and therefore did not qualify for the Financial Institution Exception.

The TCC took the position that the “business” of Glenhuron involved both the receipt of funds and the use of funds. The TCC further found that the rationale for the arm’s length requirement in the Financial Institution Exception was a focus on local competition which, in the context of the banking sector, largely concerned the raising of funds such as deposits. As Glenhuron did not fund itself by way of third-party customer deposits, but rather obtained its funds almost entirely from equity capital invested by the Loblaw group, the TCC determined that Glenhuron’s business was conducted principally with non-arm’s length persons.

FCA Decision

The FCA allowed the taxpayer’s appeal. The FCA determined that the jurisprudence supports a long-standing distinction between “capital to enable [people] to conduct their enterprises” and “the activities by which they earn their income”. Accordingly, the FCA found that the business of Glenhuron did not include the capital invested in Glenhuron by the Loblaw group, which was a shareholder decision that did not occupy the time and attention of Glenhuron in any meaningful way.
Further, the FCA took issue with the TCC’s focus on competitiveness as the underlying rationale of the arm’s length requirement in the Financial Institution Exception, finding that it amounted to inferring a purposive interpretation from unexpressed legislative intent.

SCC Decision

The Crown appealed the FCA decision to the SCC, which unanimously dismissed the appeal. The SCC framed the question as a “remarkably straightforward” question of statutory interpretation; that is, what does it mean to conduct business?

The SCC rejected the Crown’s argument that the FAPI regime generally, and the arm’s length requirement in particular, reflect an anti-avoidance purpose. The SCC drew on Department of Finance materials to conclude that the FAPI regime reflects the balance between two competing policy goals: capital export neutrality and capital import neutrality. Capital export neutrality is achieved when foreign source income is taxed in a manner similar to domestic source income, thus making a Canadian taxpayer indifferent as to whether it invests in Canada or abroad and thereby protecting Canada’s tax base from erosion. Capital import neutrality is achieved when a Canadian taxpayer investing in a foreign country is subject to the same effective tax rate as local competitors, thus ensuring a level playing field. Capital export neutrality would lean towards imposing Canadian taxes on international income, while capital import neutrality would lean towards the opposite. Broadly, the FAPI regime attempts to balance these two competing goals by generally imposing Canadian taxes on a current basis on income considered to be “passive”, and not doing so on “active” income.

The SCC concluded that there is no evidence that the arm’s length requirement has a specific purpose of anti-avoidance, as maintained by the Crown, or of promoting international competitiveness, as concluded by the TCC. The SCC agreed with the FCA that the TCC’s imposition of a requirement that Glenhuron compete for customers is an example of inappropriately inferring an unexpressed legislative intent. Similarly, the SCC concluded that reading in an anti-avoidance purpose would require the Court to rewrite the legislation.

In any event, the SCC held that the words of the provisions at issue were so clear that the interpretation of the text itself (and the meaning of “business” in the context) should decide the case rather any appeals to alleged and unexpressed legislative intent. The SCC emphasized that the unified textual, contextual and purposive approach to statutory interpretation in a taxation context requires a focus on the text and context in assessing the broader purpose of the scheme. In particular, when one is concerned with detailed and highly intricate provisions such as those present in the FAPI regime, full effect should be given to Parliament’s precise and unequivocal words in order to permit taxpayers to act with any degree of certainty.

The SCC found that while the word “business” may be broad, the words here are “business conducted”, which reflects an intent to focus on the active carrying out of the business rather than on the establishment of prerequisite conditions that enable a foreign affiliate to conduct business. The SCC found that while raising capital is a necessary part of any business, it is not the conduct of the business. The SCC stated that this does not change in the banking context. Rather, there is a distinction between receiving funds from depositors (who are clients of the bank and thus part of the bank’s business) and receiving funds from shareholders.

The SCC noted that there was a longstanding distinction in tax jurisprudence between the conduct of business and the raising of capital. The SCC further provided several reasons why including the raising of capital as part of the conduct of the business would be an incongruous reading of the Financial Institution Exception and would have other consequences to the FAPI regime that Parliament could not have intended.

The SCC further found that corporate oversight by a parent does not form part of the conduct of a company’s business. A company may conduct business using money provided by the shareholders or in accordance with policies adopted by its board on behalf of the shareholder, but the company is nevertheless separate from its shareholder and remains the party that is conducting business. Loblaw’s corporate oversight of Glenhuron’s activities did not result in those activities being considered not to be conducted with arm’s length persons for purposes of the Financial Institution Exception.

Having excluded capitalization and corporate oversight from the analysis, the SCC concluded that only Glenhuron’s revenue generating activities constituted the conduct of its business, and these activities were principally conducted with arm’s length persons (e.g., the counterparties to the swaps and issuers of debt obligations).
The SCC briefly mused whether the relevant “business” should be Glenhuron’s investment activities as a whole, or whether the activities could be segmented into different lines of investment businesses. However, as neither party to the appeal argued the point, the SCC left the question for another day.


The Loblaw Financial decision is important even though the arm’s length exception has been significantly amended subsequent to the taxation years involved in the case. The decision provides guidance as to the weight to be given to the underlying legislative purpose of a particular tax provision where the language used in drafting the provision is detailed and precise. Being able to rely on the clear and precise words of a provision will provide taxpayers with a greater degree of certainty as to the tax consequences of their activities.


Both Alta Energy and Loblaw Financial stand as steadfast affirmations of the fundamental principles underlying Canadian tax law. A unanimous Supreme Court in Loblaw Financial and the Majority in Alta Energy explicitly pay tribute to the longstanding Duke of Westminster principle: that taxpayers are entitled to arrange their affairs to minimize tax payable (from Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)). But these cases do more than that. These cases are a welcome addition to the body of Canadian tax jurisprudence that emphasizes the need for certainty and predictability in tax law, and the fairness that emanates from interpreting precise and unequivocal rules in a manner that accords sufficient weight to statutory text and context. While considering legislative purpose remains an important aspect of the exercise of statutory interpretation, placing undue weight on alleged statutory purposes – especially in the absence of clear and convincing proof of such purposes – is a fundamental departure from the required legal analysis. Similar principles are also at play in the interpretation of tax treaties, where the requisite fairness flows from holding contracting states to their intended bargains. Canadian taxpayers can continue to rely on the principles that have animated tax law analysis for decades, knowing that the rules by which they govern themselves will not shift based on after-the-fact value judgments or unsubstantiated theories about what tax laws ought to have been enacted in years past.

For more information, please contact:

Carrie Aiken                  403-260-9775
Jeffrey Shafer               416-863-3187
Mark Tonkovich           416-863-5258
Chris Van Loan             416-863-2687
Annika Wang                416-863-3873

or any other member of our Tax group.