Claiming exemption not predicated on resident of Luxembourg having made any particular investment

Tax – Income tax – Foreign income

Taxpayer was incorporated under laws of Luxembourg and foreign companies, and had, as sole shareholder, A. Canada, which was partnership established under laws of Alberta and which was wholly owned Canadian subsidiary of A. U.S. LLC. A. Canada carried out development of its Working Interest in Alberta through unconventional shale oil business through D. Formation. Structure of A. Canada had to be revised, because without restructuring it would have been subject to tax on prorata share of certain categories of passive income, and Luxembourg tax authorities confirmed that proposed restructuring was compliant with tax legislation in Luxembourg. A. Canada applied for petroleum and natural gas license from government of Alberta, to get exclusive rights to drill for and recover oil and natural gas, and drilled six horizontal and vertical wells. A. Luxembourg sold shares of A. Canada, and realized large capital gain on sale of shares and sought Canadian income tax exemption under s. 13 (5) of Canada-Luxembourg Income Tax Convention 1999 (Treaty). Minister denied that exemption applied for one taxation year, and assessed taxpayer accordingly. Taxpayer successfully appealed Minister's decision, and tax court judge found that GAAR did not apply because there was no abuse of Act or Luxembourg Convention. Minister appealed. Appeal dismissed. Proper focus for GAAR analysis was on provisions of Luxembourg Convention, and if there was no abuse of Luxembourg Convention, there would be no abuse of paragraph 115(1)(b) of Income Tax Act. It did not seem that claiming exemption from tax in Canada, on gain realized on sale of shares of particular company, was predicated on resident of Luxembourg having made any particular investment in that company. To add requirement that resident of Luxembourg must have made investment in relevant company, would then require speculation on amount and source of such investment that would be necessary for person to be eligible for exemption from tax in Canada.

Canada v. Alta Energy Luxembourg S.A.R.L. (2020), 2020 CarswellNat 314, 2020 FCA 43, Wyman W. Webb J.A., D.G. Near J.A., and George R. Locke J.A. (F.C.A.); affirmed (2018), 2018 CarswellNat 4615, 2018 TCC 152, Robert J. Hogan J. (T.C.C. [General Procedure]).

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