A Luxembourg corporation created as a tax conduit sold shares in its Canadian subsidiary for approximately $680 million, realizing a capital gain in excess of $380 million, and claimed an exemption from Canadian income tax under the Canada-Luxembourg tax treaty's business property exemption for capital gains on shares deriving value principally from immovable property used in a business.
The Minister denied the treaty exemption and argued the general anti-avoidance rule (GAAR) applied because the respondent lacked genuine economic connections to Luxembourg.
The majority held that the Minister failed to discharge the burden of proving abusive tax avoidance, finding that the provisions of the Treaty operated as intended and that Canada had deliberately chosen not to include anti-conduit provisions in the Treaty.
The dissent would have allowed the appeal, finding that the respondent's patent lack of economic connection to Luxembourg frustrated the underlying rationale of the Treaty's allocation of taxing rights.
