GAAR & International Tax Treaties

Volume No. 06-23

“CRA loses landmark case on application of GAAR to an International Tax Treaty.”

The case of MIL Investments S.A. v. the Queen, 2006 TCC460 answers the perplexing question as to whether the General Anti-Avoidance Rule (GAAR) can apply to the plain wording and interpretation of an international tax treaty. In this case, MIL Investments S.A., originally a Cayman Island company, migrated to Luxembourg prior to selling shares of a Canadian corporation. Absent the shuffle to Luxembourg, the capital gain would have been taxable in Canada. However, the provisions of the Canada/Luxembourg International tax treaty overrode, to provide for an exemption from Canadian tax.

CRA attempted to argue that the claim of an exemption under the treaty was an abuse, which should be struck down under GAAR, particularly as this rule is now extended to cover international tax treaties.

The Court did not agree. In his decision, Mr. Justice Bell stated:

“the appellants reliance upon a treaty provision as agreed upon by both Canada and Luxembourg cannot be viewed as being a misuse or abuse. Canada, if concerned with the preferable tax rates of any of its treaty partners, instead of applying section 245, should seek recourse by attempting to renegotiate the selected tax treaties.”

CRA, however, advanced a second argument. It stated that even if GAAR does not apply to deny the treaty benefit in this case, there may be an implied rule in interpreting treaties which can deny a treaty benefit based on an anti-abuse rule inherent within the treaty itself. Mr. Justice Bell found that there was no inherent anti-abuse rule in the treaty. He stated:

“in particular, in light of the OECD commentary and the decision by Canada and Luxembourg not to include an explicit reference to anti-avoidance rules in their carefully negotiated treaty, I find there is no ambiguity in the treaty permitting it to be construed as containing an inherent anti-abuse rule. Simply put, the ‘ordinary meaning’ of the treaty allowing the appellant to claim the exemption must be respected.”

The judgement in this case is sound and well reasoned. It is very definitive in its analysis. While there is always the possibility of this being appealed, this represents the law as far as international treaties and abuse are concerned.

It is reassuring to know that one can rely on the plain wording of an international treaty, and that there is no other set of rules (possibly unwritten rules) that one needs to consider in the interpretation. The judgement is refreshing in its clarity and the precision of its arguments.


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