Canada vs ALTA Energy Luxemburg, September 2018, Case no 2014-4359(IT)G

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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.

The Judgement of the Court
The appeal was allowed and the matter referred back to the tax authorities for reconsideration and reassessment.

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