Much of Canada’s resource sector is owned by US-based investors. US investors should consider the most tax effective arrangement to acquire and hold Canadian resource assets. One common strategy is to use a corporation resident in the Netherlands for this purpose.
A US resident investor who acquires shares of a Canadian corporation the principal value of which is derived from Canadian resource property will generally be subject to Canadian capital gains tax on the disposition of those shares.9 However, a Dutch resident investor who sells shares of a Canadian corporation the principal value of which is derived from Canadian resource property may be exempt from paying any Canadian capital gains tax on the disposition under the Canada – Netherlands Tax Treaty.10
Article XIII of the Canada – Netherlands Tax Treaty provides that gains on the alienation of shares of a Canadian corporation the principal value of which is derived from “immovable property” is subject to Canadian capital gains tax. However, for these purposes “immovable property” “does not include property (other than rental property) in which the business of the company, partnership, trust or estate is carried on”. The Canada Revenue Agency has confirmed that “immovable property” under the Canada – Netherlands Tax Treaty does not include Canadian resource property which is “actively exploited or held for future exploitation.”11 The Canada Revenue Agency has also stated that:
In our view, oil and gas reserves and royalty interests will be excluded from the definition of immovable property for the purposes of paragraph 4 of Article XIII [of the Canada – Netherlands Tax Treaty] if the owner is actively engaged in the exploitation of natural resources and if such assets are actively exploited or kept for future exploitation by such owner. […]
We contrast this with a passive investor or an investor who is in the business of buying and selling working interests or royalties for speculation purposes without being directly involved in the exploitation of the underlying reserves. In our view, such investors would not be considered to be actively engaged in the exploitation of natural resources. It is also our opinion that the mere buying and selling of working interests or royalties would not constitute exploitation.12
Therefore, a Dutch holding company (unlike a US resident person) that disposes of shares of a Canadian resident corporation the principal value of which is derived from Canadian resource property and which resource property is actively exploited or held for future exploitation should be exempt from Canadian capital gains tax on disposition. US investors acquiring shares of a Canadian oil and gas company should thus consider making their investment through a Dutch Holdco to avoid Canadian capital gains tax on the disposition of those shares.
In establishing this type of tax planning structure, US residents need to be aware of so-called "treaty shopping" restrictions, that is, restrictions with respect to the use of tax treaties in tax planning. International tax law is complex and requires careful consideration of domestic law and bilateral tax treaties. Gowlings tax lawyers, members of Taxand, a global network of leading tax advisors, can assist foreign investors in planning the most tax effective arrangement for their acquisition of Canadian energy assets.