The Duke of Westminster Principle Still Lives On for Tax Planning
Written By Ed Kroft, QC
On November 26, 2021, the Supreme Court of Canada released its decision and reasons in Her Majesty the Queen and Alta Energy Luxembourg S.A.R.L., 2021 SCC 49. This case involved the application of the General Anti Avoidance Rule (GAAR) in section 245 of the Income Tax Act and "treaty shopping." The taxpayer was successful with the judges splitting 6-3 in their views. The reasons of the majority and the minority are both interesting to read for many reasons. What resonated with me were general comments about the GAAR and about the "Duke of Westminster" principle (The Duke) pertaining to tax planning. The well-accepted Duke of Westminster principle states that “taxpayers are entitled to arrange their affairs to minimize the amount of tax payable.”
The Duke Still Lives On!
Paragraphs 29 and 30 of the Majority Reasons written by Justice Côté state:
" Like all statutes, tax legislation must be interpreted by conducting a “textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole” (Canada Trustco, at para. 10). However, where tax provisions are drafted with “particularity and detail”, a largely textual interpretation is appropriate in light of the well-accepted Duke of Westminster principle that “taxpayers are entitled to arrange their affairs to minimize the amount of tax payable” (Canada Trustco, at para. 11, citing Commissioners of Inland Revenue v. Duke of Westminster,  A.C. 1 (H.L.)). This principle, derived from the rule of law, has been deemed the “foundation stone of Canadian law on tax avoidance” (B. J. Arnold, “Reflections on the Relationship Between Statutory Interpretation and Tax Avoidance” (2001), 49 Can. Tax J. 1, at p. 3).
 This established principle was affected by the enactment of s. 245 of the Act, also known as the GAAR, which “superimposed a prohibition on abusive tax avoidance, with the effect that the literal application of provisions of the Act may be seen as abusive in light of their context and purpose” (Canada Trustco, at para. 1). Thus, if the Minister can establish abusive tax avoidance under the GAAR, s. 245 of the Act will apply to deny the tax benefit even where the tax arrangements are consistent with a literal interpretation of the relevant provisions (Copthorne Holdings Ltd. v. Canada, 2011 SCC 63,  3 S.C.R. 721, at para. 66). The GAAR applies both to the abuse of provisions found in the Act and to the abuse of provisions found in a tax treaty (s. 245(4)(a)(i) and (iv) of the Act; s. 4.1 of the Income Tax Conventions Interpretation Act, R.S.C. 1985, c. I-4)."
Paragraph 96 of the Majority Reasons adds the following:
" A final note on the Minister’s implication that treaty shopping arrangements are inherently abusive. A broad assertion of “treaty shopping” does not conform to a proper GAAR analysis. In accordance with the separation of powers, developing tax policy is the task of the executive and legislative branches. Courts do not have the constitutional legitimacy and resources to be tax policy makers (Canada Trustco, at para. 41). It is for the executive and legislative branches to decide what is right and what is wrong, and then to translate these decisions into legislation that courts can apply. It bears repeating that the application of the GAAR must not be premised on “a value judgment of what is right or wrong [or] theories about what tax law ought to be or ought to do” (Copthorne, at para. 70). Taxpayers are “entitled to select courses of action or enter into transactions that will minimize their tax liability” (Copthorne, at para. 65). The courts’ role is limited to determining whether a transaction abuses the object, spirit, and purpose of the specific provisions relied on by the taxpayer. It is not to rewrite tax statutes and tax treaties to prevent treaty shopping when these instruments do not clearly do so."
Even the Minority reasons, written by Justices Rowe and Martin, accept that The Duke is not dead:
" Although it is a long standing principle in Canadian law that taxpayers may arrange their affairs to minimize their amount of tax payable (Commissioners of Inland Revenue v. Duke of Westminster,  A.C. 1 (H.L.); Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54,  2 S.C.R. 601, at para. 11), the freedom to do so is not without limits. Canada has acted to curb abusive international tax avoidance by enacting the general anti-avoidance rule (“GAAR”), which denies tax benefits when taxpayers engage in transactions that conform with the text of the tax rules relied upon, but do not accord with their rationale. In introducing the GAAR in our tax legislation some 30 years ago, and in making it clear that it was applicable to abuses of tax treaties, Parliament made a policy choice by which it intended to fight harmful tax avoidance schemes that cross the line of legitimate tax planning and venture into the realm of abusive tax avoidance."
Tax Abuse, Tax Evasion and Morality
I expect that paragraphs 47-49 of the Reasons will be quoted in whole or in part by courts. These comments are most welcome and are important expressions of clarity. Taxpayers will sometimes see letters from the Canada Revenue Agency which conflate the concepts of abuse and evasion and which base assessments on the application of moral standards, notwithstanding the comments of Justice Rothstein in the Copthorne Holdings Ltd. v. Canada, 2011 SCC 63. These paragraphs speak for themselves:
" First and foremost, tax avoidance is not tax evasion, and there is no suggestion by either party that the transaction in this case was evasive. In addition, tax avoidance should not be conflated with abuse. Even if a transaction was designed for a tax avoidance purpose and not for a bona fide non-tax purpose, such as an economic or commercial purpose, it does not mean that it is necessarily abusive within the meaning of the GAAR (Canada Trustco, at paras. 36 and 57; see also Lipson, at para. 38). The purpose of a transaction is relevant mainly to characterize it as either an avoidance transaction or a bona fide transaction and, specifically, to assess the abusive nature of the transaction. In their factual analysis, courts may consider whether an avoidance transaction was “motivated by any economic, commercial, family or other non-tax purpose” (Canada Trustco, at para. 58). However, a finding that a bona fide non-tax purpose is lacking, taken alone, should not be considered conclusive evidence of abusive tax avoidance. Justices Rowe and Martin are taking exactly that approach, and it colours their entire analysis. Moreover, such a finding should not be allowed to impair the proper interpretation of the relevant provisions in a manner that makes substantive economic connections or the presence of a bona fide non-tax purpose a condition precedent to every tax benefit; the goal is to ensure the relevant provisions are properly interpreted in light of their context and purpose (Canada Trustco, at para. 62).
 Second, it is also important to distinguish what is immoral from what is abusive. It is true, as reiterated in Copthorne, that the GAAR is a legislative measure by which “Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer” (para. 66). But, in Copthorne, Rothstein J. was quick to note the limits to that legislative mandate. In contrast to what my colleagues are proposing, Rothstein J. observed that courts should not infuse the abuse analysis with “a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do” (para. 70). Taxpayers are allowed to minimize their tax liability to the full extent of the law and to engage in “creative” tax avoidance planning, insofar as it is not abusive within the meaning of the GAAR (para. 65). Therefore, even though one may consider treaty shopping in tax havens to be immoral, this is not determinative of a finding of abuse.
 Finally, the abuse analysis is not meant to be a “search for an overriding policy of the Act that is not based on a unified, textual, contextual and purposive interpretation of the specific provisions in issue” (Canada Trustco, at para. 41). The focus of the interpretation is on the object, spirit, and purpose of the specific provisions and not on the broader policy objective of the Act or of a particular tax treaty. Therefore, policy objectives such as “avoiding double taxation” and “encouraging trade and investment” that are found in bilateral tax treaties cannot be invoked to override the wording of the provisions in issue."
If you have any questions, please contact a member of the Bennett Jones Tax group. Please read Supreme Court of Canada Upholds Treaty-Based Canadian Holding Structure regarding the implications of this decision for future tax planning.
For more information on tax planning and tax treaties, you can also read New Ratifications of the OECD's Multilateral Instrument Put Canadian Resource Holding Structures at Risk.