Canada vs MIL (INVESTMENTS) S.A., August 2006, Tax Court of Canada, Case No 2006 TCC 460

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The issue is whether MIL (INVESTMENTS) S.A. was exempt from Canadian income tax in respect of the capital gain of $425,853,942 arising in its 1997 taxation year on the sale of shares of Diamond Field Resources Inc. by virtue of the Canadian Income Tax Act and the Convention Between Canada and 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 Canadian Tax Authorities found that MIL was not exempt under local anti avoidance provisions and issued an assessment where the capital gain had been added to the taxable income.

Disagreeing with the assessment, MIL (INVESTMENTS) S.A. filed an appeal with the Tax Court.

Judgement of Tax Court

The court allowed the Appeal of MIL investments and set aside the assessment issued by the tax authorities.


“Accordingly, having found that, at the time of the Series, DFR had no desire of allowing itself to be sold to any buyer, I conclude that the Sale cannot be included in that series because of a mere possibility of a future potential sale of any shares.”

“Having found that the Sale and none of the transactions in the Series are avoidance transactions, it is not necessary for me to analyze whether any of those transactions is abusive under subsection 245(4). If I were to do such an analysis, however, I would focus on whether a specific provision or article of the Treaty or Act was misused or abused. In the Appellant’s case, I would consider specifically, the exemptions relied upon by the Appellant in Article 13(4).”

“I do not agree that Justice Iaccobucci’s obiter dicta can be used to establish a prima facie finding of abuse arising from the choice of the most beneficial treaty. There is nothing inherently proper or improper with selecting one foreign regime over another. Respondent’s counsel was correct in arguing that the selection of a low tax jurisdiction may speak persuasively as evidence of a tax purpose for an alleged avoidance transaction, but the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive. It is the use of the selected treaty that must be examined.”

“The Respondent presented the alternative written argument that:
Even if the GAAR does not apply to deny the treaty benefit in this case, it is still possible to deny the treaty based on the anti-abuse rule inherent within the Treaty itself.

in light of the OECD commentary and the decision by Canada and Luxembourg not to include an explicit reference to anti-avoidance rules in their carefully negotiated Treaty, I find there is no ambiguity in the Treaty permitting it to be construed as containing an inherent anti-abuse rule. Simply put, the “ordinary meaning” of the Treaty allowing the Appellant to claim the exemption must be respected.”


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MIL (Investments) S A v. The Queen - Tax Court of Canada 2006

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