We recently reported (see Volume 3, Number 3 of this publication) on a decision of the Tax Court of Canada in the case of MIL (Investments) S.A. relating to an attempt by the Canada Revenue Agency ("CRA") to apply the so-called "general anti-avoidance rule" or "GAAR" to a case of alleged abusive treaty shopping. The decision of the Federal Court of Appeal in the appeal by the CRA of the Tax Court of Canada decision was recently released.
As reported earlier, the Canadian courts have consistently held that in order for the GAAR to be applicable to deny a "tax benefit" that arises from a transaction or series of transactions, a number of tests must be satisfied including, in general terms, that the impugned transaction or transactions give rise to a misuse of the provisions of the Canadian tax act or an abuse having regard to the provisions of that act read as a whole. The decision of the Federal Court of Appeal was direct and succinct in this regard. The Court stated that it was "unable to see in the specific provisions of the [Canadian Tax Act] and the [Luxembourg-Canada] Tax Treaty…any support for the argument by the [Canada Revenue Agency] that the tax benefit obtained by the [taxpayer] was an abuse or a misuse of the object and spirit of any of those dispositions". The Court went on to say that "[the CRA] urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose".
It seems that in what can fairly be described as an extremely brief and clear judgment, the Federal Court of Appeal has confirmed that it will be extremely difficult for the CRA to try to successfully apply the GAAR to what it might perceive to be abusive treaty shopping.