Tax treaty shopping and the GAAR: MIL (Investments) S.A. v. The Queen.

AuthorBrown, Kimberly
PositionGeneral Anti-Avoidance Rule

I INTRODUCTION II MIL (INVESTMENTS) S.A.V. THE OUEEN Facts Tax Court Decision III AVOIDANCE TRANSACTION Avoidance Transaction Series of Transactions IV TREATY MISUSE OR ABUSE UNDERTHE GAAR Textual, Contextual and Purposive Analysis Text Specific Anti-Avoidance Rules Domestic Law and Ordinary Meaning Summary Context Purpose The 2003 OECD Commentary Summary V TREATY SHOPPING Introduction Cases and Commentary Policy Considerations The MIL Case VI CONCLUSION Abstract

In 2005, the Canadian Parliament amended the General Anti-Avoidance Rule, or "GAAR", under s. 245 of the Income Tax Act to explicitly include Canada's tax treaties within the scope of the rule. The amendment was retroactive, applying to transactions executed from September 13, 1988 onward. In July 2006, the Tax Court of Canada heard the first GAAR case involving "treaty shopping' transactions conducted pursuant to a tax treaty in MIL (Investments) S.A. v. The Queen. This article examines the decision by the Tax Court, which was upheld by the Federal Court of Appeal in June 2007.

The author argues that while the Tax Court reached the correct result in finding that the GAAR did not apply, its analysis of avoidance transactions, misuse and abuse was flawed in several respects. Specifically, the transactions in MIL met the definition of an avoidance transaction under subsection 245(3) of the ITA because even though the transaction that yielded the tax benefit (a sale of shares) was not in itself an avoidance transaction, it was part of the series of transactions which did include avoidance transactions under paragraph 245(3)(b) of the ITA. Assuming that the transaction was an avoidance transaction, the article then concludes that a textual, contextual, and purposive analysis of the facts and statutes does not support the Minister's argument that either the Act or the treaty in question was misused or abused under subsection 245(4). This analysis is based on research of case law, other treaties to which Canada is a party, international opinion as expressed by the OECD and its member states, and relevant policy considerations.

Ultimately, the MIL case is important because it is the first case involving treaty shopping and the GAAR. The Minister's arguments, unfortunately, were unpersuasive. As such, it would be generally preferable to rely on existing anti-avoidance provisions within tax treaties themselves, rather than to resort to the domestic GAAR provisions. It is probable, however, that a court will be more amenable to the argument that treaty shopping is abusive in future cases where the abuse is more blatant and the transactions in question lack an apparent non-tax business purpose.


En 2005, le Parlement du Canada a modifie la regle generale anti-evitement ou > qui se trouve dans l'article 245 de la Loi de l'impot sur le revenu pour inclure formellement les traites fiscaux auxquels le Canada est signataire dans les parametres de la loi. L'amendement est retroactif et s'applique aux transactions executees a partir du 13 septembre, 1988. En juillet 2006, la Cour canadienne de l'impot a juge le premier cas RGAE portant sur les transactions impliquant du magasinage de traite fiscal dans MIL (Investissements) S.A. v. La Reine. Cet article examine la decision de la Cour de l'impot, qui fut confirmee par la Cour d'appel federale en juin 2007.

L'auteur avance que, bien que la Cour de l'impot soit arrivee a la bonne decision en jugeant que la RGAE ne s'appliquait pas, son analyse sur les transactions d'evitement, sur le mauvais emploi et sur l'abus contenait plusieurs erreurs. En particulier, les transactions dans MIL correspondent a la definition d'une transaction d'evitement qui se trouve dans l'alinea 245(3) de la Loi, parce que meme si la transaction qui a produit les avantages fiscaux (une vente d'actions) n'etait pas en soi une transaction d'evitement, elle faisait partie d'une serie de transactions qui correspondait aux transactions d'evitement qui se trouvent dans le paragraphe 245(3J(b) de la Loi. Si l'on suppose que la transaction est une transaction d'evitement, l'article se conclut en indiquant qu'une analyse textuelle, contextuelle et intentionnelle des faits et des textes juridiques n'appuie pas l'argument du Ministre qui dit que la Loi ou la convention en question a ete mal employee ou abusee selon l'alinea 245(4). Cette analyse se base sur la jurisprudence existante, d'autres traites impliquant le Canada, l'opinion internationale tel qu'exprimee par l'OCDE et ses etats membres, et les considerations pertinentes de principe de droit.

En fin de compte, le cas MIL est important car c'est le premier cas portant sur le magasinage de traite et la RGAE. Malheureusement, les arguments du Ministre ne sont pas convaincants. Ceci etant dit, il serait preferable de compter sur les regles anti-echappatoires qui existent a meme les traites fiscaux au lieu de se fier aux regles domestiques de la RGAE. Cependant, il se peut qu'un tribunal soit plus souple envers cet argument vis-a-vis l'abus de traites fiscaux dans les cas futurs oU l'abus est plus ehonte et les transactions en question n'ont pas d'objectif apparent autre que la reduction d'impots a payer.


In 2005, Parliament amended the General Anti-Avoidance Rule (GAAR) under s. 245 of the Income Tax Act (ITA) so as to explicitly include Canada's tax treaties within the scope of the rule. (1) The retroactive amendment confirmed that the GAAR may be used to deny tax benefits obtained under Canada's tax treaties via transactions executed from September 13, 1988 onward, the original date of the GAAR's applicability. It also resolved the academic debate over whether the GAAR could be applied to tax treaty transactions.

In the same year, the concurrent Supreme Court of Canada decisions of Canada Trustco v. Canada and Mathew v. Canada set out the judicial tests to be used in interpreting the application of the GAAR to transactions involving the ITA. (2) Nonetheless, there had been no cases dealing with the additional layer of complexity involved when applying the GAAR to transactions conducted pursuant to a tax treaty until July 2006, when the Tax Court of Canada heard MIL (Investments) S.A. v. The Queen. (3)

MIL involved a corporation resident in Luxembourg, which had claimed a tax exemption on proceeds from the sale of Canadian shares under the Canada-Luxembourg Tax Treaty. (4) On its face, the transaction qualified for the exemption. The Minister of National Revenue, however, reassessed the transaction under the GAAR based on the circumstances leading to the sale. In August 2006, Bell J. handed down his decision. He found that while a tax benefit had been obtained, the transaction was not an avoidance transaction as defined under subsection 245(3). (5) While this finding was sufficient to settle the GAAR analysis, Bell J. went on to conclude that there had also been no misuse or abuse of the treaty under the amended subsection 245(4). (6) In June 2007, the Federal Court of Appeal upheld the decision of the Tax Court. (7)

The general implication of MIL is that although the Crown is ready and willing to apply the amended GAAR to transactions involving tax treaties, it is not yet clear how exactly the GAAR should be applied. This uncertainty is significant, considering that Canada currently has over 80 enacted tax treaties and the majority of Canadian foreign direct investment is conducted with tax treaty partners. (8) The purpose of this article is to examine the MIL decision in detail and to argue that while the decision was ultimately correct, the Tax Court's analysis was flawed in several respects. More generally, this article will also argue that treaty shopping by itself is not abusive, having regard to existing jurisprudence and international opinion.

Sections II and III present the relevant facts and the decision in MIL in detail, and conclude that the transactions in the case met the definition of an avoidance transaction under subsection 245(3) because even though the transaction giving rise to the tax benefit was not an avoidance transaction by itself, it was part of a series of transactions that met the definition of an avoidance transaction under paragraph 245(3)(b).

Assuming that there was an avoidance transaction, Section IV applies the Supreme Court's textual, contextual, and purposive GAAR analysis from Canada Trustco, and concludes that neither the text nor context of the Canada-Luxembourg Treaty supports a finding of abuse by MIL (Investments) S. A. Furthermore, international opinion regarding the purpose of tax treaties provides no clear guidance as to what kind of avoidance transactions frustrate the purpose of a tax treaty when no specific provision has been violated.

Recognizing this lack of certainty, Section V considers relevant cases, commentary and policy issues surrounding treaty shopping. The section concludes that while treaty shopping could be caught by the GAAR in some circumstances, it is not in and of itself abusive of Canada's tax treaties. This section outlines the arguments made by the parties in MIL and concludes that the taxpayer did not abuse the Canada-Luxembourg Treaty.


In order to properly analyze Bell J.'s finding in MIL, it is necessary to examine the series of transactions leading up to the final sale of Canadian shares which was the subject of the Minister's reassessment. This section sers out these facts as affirmed by the Tax Court in MIL.


Prior to June 1995, Jean-Raymond Boulle had been a resident of Belize. After that date, he became a resident of Monaco. Beginning in 1993, Boulle began acquiring shares in a Canadian shell company whose name was changed to Diamond Fields Resources Inc. (DFR). (9) DFR traded on the Toronto Stock Exchange and was in the business of acquiring, exploring, and developing diamond properties. In March 1993, Boulle also incorporated MIL (Investments) S.A...

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