In 2011 Alta Energy Partners Canada Ltd. (Alta Canada) was a Canadian-incorporated company and fully owned subsidiary of Alta Energy Partners, LLC. (Alta US).
In 2012, a business restructuring occurred within the group: Alta Energy Luxembourg SARL (Alta Luxembourg) was incorporated as a Luxembourg holding company with Alta US LLC transferring “common shares” of Alta Canada to the newly established holding.
No capital gain has been realized because the fair market value of the Alta Canada shares was equal to their adjusted cost base.
In 2013, Alta Luxembourg realized a capital gain of USD 380 Mil selling its shares in Alta Canada to a third party. Alta Luxembourg claimed a tax exemption in Canada under Article 13(4) of the Canada-Luxembourg Income Tax Convention (the Treaty), but this capital gain was not taxable in Luxembourg either under its domestic tax law.
The Government of Canada argued that Alta Luxembourg engaged in Treaty Shopping, as its strategy was driven by tax reasons and its economic ties with Luxembourg were not sufficient, therefore Treaty Benefits should be denied, based on the application of the GAAR.
The Supreme Court rejected the Government’s reasoning, given that Alta Luxembourg met the Treaty requirements as a Luxembourg Tax Resident.
The Court stated that the GAAR applies when the misuse or abuse is evident and clear and that a tax-motivated transaction cannot be considered at the same time automatically abusive.