Tax Treaty Case: MIL (Investments) S.A. v. The Queen, 2006 TCC 460Par Robert Robillard - 5 février 2015
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«  The issue is:
Whether the Appellant is 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 theConvention 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 »). »
Article 13 of the tax treaty is indeed at issue in this case. The CRA also invokes the applicability of section 245 of the Canadian Income Tax Act which pertains to avoidance:
«  The issue, restated, is:
1. Does section 245 apply to deny the exemption from tax on a capital gain of $425,853,942 arising in the Appellant’s 1997 taxation year on the sale of DFR shares pursuant to the Treaty? (« Sale »)
2. If not, is there an inherent anti-abuse rule in the Treaty which would deny that exemption?
 Section 4.1 of the Income Tax Conventions Interpretation Act, R.S.C., 1985, c I-4 and section 245 of the Act were retroactively amended effective September 12, 1988 to make explicit reference to tax treaties.44
 In Canada Trustco v. Canada, 2005 SCC 54 (CanLII), 2005 DTC 5523, the Supreme Court of Canada, in paragraph 7, said:
In our view, this amendment to s. 245 serves inter alia to make it clear that the GAAR applies to tax benefits conferred by Regulations enacted under the Income Tax Act.
 These amendments, made in 2005, are retroactive to transactions completed some 17 years ago. Retroactive legislation, although within the power of Parliament is legal but undesirable. [Respecting the legality of retroactive legislation see Air Canada v. British Columbia, 1989 CanLII 95 (SCC),  1 S.C.R. 1161 and British Columbia v. Imperial Oil, 2005 SCC 49 (CanLII)] The inappropriateness of reassessing taxpayers who completed transactions in accordance with the law in force at the time of those transactions without any expectation of adverse retroactive effect is self-evident.
 In my view, the impact of the amendments to section 245 is that tax treaties must be interpreted in the same manner as domestic legislation when analyzing potentially abusive avoidance transactions. »
The Court therefore proceeds with an analysis of section 245 ITA with respect to the issue at hand. The Court applies the « three-step analysis » as drawn up by the Supreme Court in Canada Trustco v. Canada, 2005 SCC 54 (CanLII), 2005 DTC 5523:
«  Paragraph 17 of Canada Trustco sets out the general framework of a section 245 analysis:
The application of the GAAR involves three steps. The first step is to determine whether it is a ‘tax benefit’ arising from a ‘transaction’ under s. 245(1) and (2). The second step is to determine whether the transaction is an avoidance transaction under s. 245(3), in the sense of not being ‘arranged primarily for bona fide purposes other than to obtain the tax benefit. The third step is to determine whether the avoidance transaction is abusive under s. 245(4). All three requirements must be fulfilled before GAAR can be applied to deny a tax benefit.
 The term « tax benefit » is defined in s. 245 (1) as:
a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty.
 Appellant’s counsel’s written brief states that:
For the purposes of this Appeal, the Appellant admits that in this case the application of the Treaty afforded the Appellant a tax benefit.
 Section 245(3) defines « avoidance transaction » as follows:
An avoidance transaction means any transaction
a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. »
The Court also considers the alternative argument submitted by the CRA, that is, that the « anti-abuse rule » inherent in the tax treaty should apply to the issue. This lead the Court to examine the Vienna Convention on the Law of Treaties,  Can T.S. No. 37 (articles 26, 31 and 32) and its proper application to the Canadian Income Tax Act and theConvention 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.
On that matter, the Court writes:
«  Steichen’s opinion [Professor Alain Steichen; CRA’s expert in Luxembourg tax law and income tax treaties] was that silence in a treaty equals ambiguity. Asked on cross-examination how the Treaty could have avoided ambiguity, Steichen replied:
You might want to write in the treaty that local GAAR cannot affect the validity of the application of the treaty. That would be a clear statement, in which case we would not have to, in my opinion, argue about whether that implicit anti-abuse provision exists or not.
Appellant’s counsel then presented Professor Steichen with paragraph 7 of the commentary to the 1977 OECD model, which reads:
The purpose of double tax conventions is to promote by, eliminating international double taxation… they should not, however, help tax avoidance or evasion. True, taxpayers have the possibility, double taxation conventions being left aside, to exploit the differences in tax levels as between States and the tax advantages provided by various countries’ taxation laws, but it is for the States concerned to adopt provisions in their domestic law, to counter possible manoeuvres. Such states will then wish, in their bilateral double taxation conventions, to preserve the application of a provision of this kind contained in their domestic laws.
When asked by Appellant’s counsel whether that paragraph meant « if you want an anti-avoidance rule in the treaty, you should put it in the treaty? »
I would agree with that, yes.
The exchange continued:
Q. At the time this treaty was put together, the contemporaneous material specifically said, ‘If you want to put an anti-abuse provision in a treaty, you must specifically do so.’ Would you agree with that?
A. That’s right. »
A careful examination of the facts demonstrated that tax benefits were not solely at stake in this case. Commercial motives were in fact predominant. The appeal was therefore allowed and costs were awarded to the appellant.
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Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
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