The case of MIL Investments S.A. v. the Queen, 2006 TCC460 answers the perplexing question as to whether the General Anti-Avoidance Rule (GAAR) can apply to the plain wording and interpretation of an international tax treaty. In this case, MIL Investments S.A., originally a Cayman Island company, migrated to Luxembourg prior to selling shares of a Canadian corporation. Absent the shuffle to Luxembourg, the capital gain would have been taxable in Canada. However, the provisions of the Canada/Luxembourg International tax treaty overrode, to provide for an exemption from Canadian tax.
CRA attempted to argue that the claim of an exemption under the treaty was an abuse, which should be struck down under GAAR, particularly as this rule is now extended to cover international tax treaties.
The Court did not agree. In his decision, Mr. Justice Bell stated:
CRA, however, advanced a second argument. It stated that even if GAAR does not apply to deny the treaty benefit in this case, there may be an implied rule in interpreting treaties which can deny a treaty benefit based on an anti-abuse rule inherent within the treaty itself. Mr. Justice Bell found that there was no inherent anti-abuse rule in the treaty. He stated:
The judgement in this case is sound and well reasoned. It is very definitive in its analysis. While there is always the possibility of this being appealed, this represents the law as far as international treaties and abuse are concerned.
It is reassuring to know that one can rely on the plain wording of an international treaty, and that there is no other set of rules (possibly unwritten rules) that one needs to consider in the interpretation. The judgement is refreshing in its clarity and the precision of its arguments.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.