Prior to the payment of dividends by Husky Energy Inc. to its shareholders in 2003, two of its shareholders (companies resident in Barbados) transferred their shares to companies in Luxembourg under securities lending arrangements, and therefore Husky Energy Inc. only withheld dividend tax at a reduced rate of 5% under the Canada-Luxembourg Income Tax Treaty. Judgment of the Court The Court found Husky Energy liable for failing to withhold dividend tax at the non-Convention rate of 25%. As the dividends were not paid to the Barbados companies, the 15% rate under the Canada – Barbados Income Tax Convention was not available. The Canada-Luxembourg Income Tax Convention rate was also not available as the Luxembourg companies were not the beneficial owners of the dividends as they were required to pay compensation to the Barbados companies equal to the dividends received. Excerpts “Under the securities lending arrangements, companies resident in Luxembourg enjoyed nothing more than temporary custodianship of the funds received in payment of the Dividends. The compensation payments were preordained by the terms of the borrowing requests, and this preordination ensured that at all times, the Barbcos retained their rights to the full economic value of the Dividends.” “For the foregoing reasons, HWEI and LF Luxembourg were not the beneficial owners of the Dividends for the purposes of Article 10(2) because they were legally obligated from the outset of the securities lending arrangements to return the full amount of the Dividends to the Barbcos in the form of the compensation payments. This was to occur no later than approximately seven weeks after the commencement of the securities lending arrangements. Consequently, HWEI and LF Luxembourg were not entitled to the benefit of the reduced rates of Part XIII tax provided under Article 10(2) and, for the purposes of subsections 215(1) and (6), the amount of tax under Part XIII that Husky was required to withhold and remit in respect of the Dividends was 25% of the Dividends.” “The fact that the Barbcos transferred their common shares in Husky to the Luxcos under atypical securities lending arrangements really has no bearing on whether the Transactions abuse Article 10(2). The rationale of Article 10(2) is to provide relief from double taxation by allocating the right to tax dividends between Canada and Luxembourg in accordance with the theory of economic allegiance while retaining the protections against the use of conduit‐type arrangements afforded by the beneficial owner requirement and the voting power requirement. Consistent with the theory of economic allegiance described by the majority in Alta Energy, which recognizes that a recipient of passive income need not have any allegiance to the paying country, the focus of the rationale of Article 10(2) is not how the common shares of Husky came to be owned by the Luxcos, but whether the Luxcos satisfy the residence requirement, the beneficial owner requirement and the voting power requirement. Since the hypothetical being considered assumes these requirements have been satisfied, I see no basis on which to find that the securities lending arrangements abused Article 10(2). VII. Conclusion For the foregoing reasons, the appeal of Husky is dismissed with costs to the Respondent, and the appeals of HWLH and LFMI are allowed with costs to HWLH and LFMI and the HWLH Assessment and the LFMI Assessment are vacated. While this is an unusual result, it flows from the fact that the Minister assessed the successors of the Barbcos and did not assess the Luxcos.” Click here for translations ...

ALTA Energy, a resident of Luxembourg, claimed an exemption from Canadian income tax under Article 13(5) of the Canada-Luxembourg Income Tax Treaty in respect of a large capital gain arising from the sale of shares of ALTA Canada, its wholly-owned Canadian subsidiary. At that time, Alta Canada carried on an unconventional shale oil business in the Duvernay shale oil formation situated in Northern Alberta. Alta Canada was granted the right to explore, drill and extract hydrocarbons from an area of the Duvernay formation designated under licenses granted by the government of Alberta. The Canadian tax authorities denied that the exemption applied and assessed ALTA Energy accordingly. Article 13(5) of the Canada-Luxembourg Tax Treaty is a distributive rule of last application. It applies only in the case where the capital gain is not otherwise taxable under paragraphs (1) to (4) of Article 13 of the Treaty. Article 13(4) is relevant to the outcome of this appeal. Under that provision, Canada has preserved its right to tax capital gains arising from the disposition of shares where the shares derive their value principally from immovable property situated in Canada. However, the application of Article 13(4) is subject to an important exception. Property that would otherwise qualify as Immovable Property is deemed not to be such property in the circumstances where the business of the corporation is carried on in the property (the “Excluded Property” exception). The tax authorities argued that the Shares derived their value principally from Alta Canada’s Working Interest in the Duvernay Formation. The authorities also argued that the capital gain it realized would be taxable under Article 13(4) unless the Court agreed with ALTA’s submission that its full Working Interest is Excluded Property. ALTA Energy appealed the position of the tax authorities and argued the contrary view. According to ALTA, substantially all of ALTA Canada’s Working Interest remained Immovable Property because ALTA Canada drilled in and extracted hydrocarbons from only a small area of the Duvernay Formation that it controlled. In 2018 the Federal Court of Appeal decided in favour of ALTA Energie and the matter was referred back for reconsideration and reassessment. This decision was then appealed by the tax authorities before the Supreme Court The Judgement of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities but with dissenting judges. Excerpts: [185] Nevertheless, we agree with Alta Luxembourg that treaty shopping is not inherently abusive. There is nothing necessarily improper about minimizing tax liability by selecting a beneficial tax regime in making an investment in a foreign jurisdiction (Crown Forest, at para. 49). Certain jurisdictions may provide tax incentives to attract businesses and investment; as such, taxpayers are entitled to avail themselves of such benefits to minimize tax. Thus, merely selecting a treaty to minimize tax, on its own, is not abusive. In fact, it may be consonant with one of the main purposes of tax treaties: encouraging trade and investment. [186] However, 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, in our view, abusive. As Professors N. Bammens and L. De Broe explain, the use of “conduit companies” is disconnected from the objectives of bilateral tax treaties: . . . tax treaties are concluded for reasons of an economic nature: the contracting states want to stimulate reciprocal commercial relations by preventing double taxation. The use of conduit companies and treaty shopping structures has very little to do with this economic objective. Treaty shopping thus upsets the balance and reciprocity of the tax treaty: in order to preserve a tax treaty’s inherent reciprocity, its benefits must not be extended to persons not entitled to them. [Emphasis added; footnotes omitted.] (“Treaty Shopping and Avoidance of Abuse”, in Lang et al., Tax Treaties, 51, at p. 52; see also Li and Avella, at s. 2.1.1.3.) [187] In such cases, as here, the avoidance transaction would be contrary to the objectives of bilateral tax treaties and frustrate the object, spirit or purpose of the specific provisions related to the allocation of taxing rights. Preventing such abuse is the purpose of the GAAR: “. . . most double tax treaties do not contain specific limitations on the ability of third-country residents to treaty shop [and instead] rely on the concept of beneficial ownership or on domestic anti-abuse legislation to safeguard against hollow conduits” (Krishna (2009), at p. 540). Similarly, C. A. Brown and J. Bogle are of the view that the GAAR is “[t]he primary tool to fight treaty shopping in Canada currently” (“Treaty Shopping and the New Multilateral Tax Agreement — Is it Business as Usual in Canada?” (2020), 43 Dal. L.J. 1, at p. 4). [188] In conclusion, not all types of treaty shopping lead to abuse of a tax treaty. Only when an avoidance transaction frustrates the rationale of the relevant treaty provision will treaty shopping be abusive and the tax benefit denied. For instance, where contracting parties allocate taxing rights to the state of residence on the basis of economic allegiance, as in this case, treaty shopping will be abusive if the resident of a third-party state uses a conduit company to claim treaty benefits conferred by provisions requiring a genuine economic connection with the residence state. Therein lies the undermining of these provisions’ rationale clothed in a formalistic adherence to their text. Ignoring this is to render the GAAR empty of meaningful effect. Click here for other translation ...

A Luxembourg-based limited company (LU) held a 30% stake in an Austrian stock company operating an airport. LU employed no personnel and did not develop any activities. The parent company of LUP was likewise resident in Luxembourg. LUP had business premises in Luxembourg and employed three people. All of the shares in LUP were held by a company in the British Cayman Islands in trust for a non- resident Cayman Islands-based fund. In 2015, the Austrian Company distributed a dividend to LU. LU was not yet involved in the Austrian corporation “for an uninterrupted period of at least one year” thus withholding tax was withheld and deducted. A request for refunding of the withholding tax was denied by the tax office because the dividend was distributed to recipients in a third country and the tax authorities regarded the structure as abusive. LU then appealed the decision to the Federal Fiscal Court. The Court held that the appeal was unfounded, because the tax office rightly assumed that the structure was abusive within the meaning of Austrian tax rules. LU then filed an appeal to the Austrian Administrative High Court (VwGH). The High Court overruled the Federal Fiscal Court and found that LUP had actually developed activities. An economic reason for the set-up of a company structure- for example, the professional management of long-term investments in the EU by a management holding with several employees (the LUP as the Luxembourg parent company of the appellant) – exists even if the desired economic goal would have been achieved otherwise (i.e. with a holding company located outside the EU). According to the Court, an economic reason for a set-up exists if the economic objective, as put forward in this case, was better and safer to achieve. Thus, the structure was not abusive. Click here for English translation Click here for other translation ...