Lexpert US Guides

www.lexpert.ca/usguide | LEXPERT • June 2019 | 63 like Switzerland, Ireland and the Barbados, among others. Not all are traditional cen- ters of commerce, so what they've done is they've adopted favorable tax legislation and aggressively negotiated treaties with OEDC countries. Some of them also have bank secrecy laws, so they're ideal. It's very tempting for some of these countries." For US buyers, countries such as Bermu- da and the Cayman Islands that don't have a tax treaty with Canada can still be useful in structuring a transaction because they can be holding tanks if the buyer wants to leave some income offshore. Angelo Nikolakakis, a partner of EY Law LLP in Montréal, says "the vast majority" of cross-border deals he has worked on over the years include a tax- favorable jurisdiction. "Why would you go to a store and see the product you're looking for for $10, then go to another store, see the same product for $5, and not buy it at the second store?" he asks. "Why is the de- cision-making process any different than that? It's not rational to pay more for the same thing." It's also not always done just for tax savings, Nikolakakis adds. A lot of pri- vate-equity funds use an intermediary country because they have investors in multiple jurisdictions. "If you have 1,000 investors from 10 dif- ferent countries, you need a neutral vehicle. Why should I put it in a high tax country and let that country take the taxes? Why shouldn't the economics flow through a neutral country and be picked up by the personal tax base in the various investors' countries? What's wrong with that?" Around the world, many governments and taxpayer groups say what's wrong is it leads large multinational corporations, partnerships and wealthy investors to shi their tax burden onto the shoulders of reg- ular taxpayers. Canada is losing as much as $25 billion per year to off-shore tax havens, according to a report by the Canada Rev- enue Agency. Despite attempts by the Canadian government to keep taxable income within its purview, the treaties and their provisions have been consistently upheld by the courts. In September 2018, the Tax Court of Canada held in Alta Energy Luxembourg S.A.R.L. v. Her Majesty the Queen that a Luxembourg resident corporation has the benefits of the Canada-Luxembourg Income Tax Convention without being subject, for that reason alone, to the Gen- eral Anti-Avoidance Rule (GAAR) under Canada's Income Tax Act. e case centered on Alta Energy Part- ners, LLC, a Delaware corporation, which incorporated a Canadian subsidiary in 2011 to develop a Duvernay shale property in northwestern Alberta. In 2012 it trans- ferred the shares to Alta Energy Luxem- bourg S.A.R.L. e following year it sold the shares to Chevron Canada Ltd. for ap- proximately C$680 million. e company claimed the roughly C$380-million capital gain was exempt from tax under the 1999 Canada-Lux- embourg Income Tax Convention. e government challenged that, arguing for the general anti-avoidance rule applied to the transaction so it should be denied the exemption. In ruling against the government, the court noted among other things that Can- ada specifically chose to depart from the OECD Model Treaty provisions by in- cluding a specific exemption in the Cana- da-Luxembourg treaty, so it was Canada's intention to give Luxembourg resident companies a more favorable tax treatment

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