It was reasonable to assume that treaty negotiators wanted exception to be granted in accordance with industry practices

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 (PNG 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 emption 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 appealed. Appeal allowed. Under s. 13 (4) of Treaty, there was carve-out that was exception to principle that stated that source state has jurisdiction to tax gains arising directly or indirectly from increase in value of immovable property. Rationale underlying carve-out was to exempt residents of Luxembourg from Canadian taxation where there was investment in immovable property used in business. It was clear from evidence that A. Canada carried on business of exploring for, developing and producing oil in respect of its Working Interest in D. Formation. It was also clear from evidence that once A. Canada determined that it could extract hydrocarbons on economically viable basis, it was able to attract additional capital from co-investors and in that sense, de-risking its Working Interest allowed A. Canada to secure financing for its operations. Evidence showed that if sale was to take place, it would occur through sale of shares of A. Canada and revised structure was set up to achieve this outcome. Since purpose of carve-out was to attract foreign investments, it was reasonable to assume that treaty negotiators wanted exception to be granted in accordance with industry practices.

Alta Energy Luxembourg S.A.R.L. v. The Queen (2018), 2018 CarswellNat 4615, 2018 TCC 152, Robert J. Hogan J. (T.C.C. [General Procedure]).