In March 1993 an individual ("Boulle") transferred his shares of a Canadian public junior exploration company ("DFR") to the taxpayer, which was a newly-incorporated Cayman Islands company wholly owned by him. By June 1995, the taxpayer exchanged, on a rollover basis pursuant to s. 85.1, a portion of its DFR shares (which had substantially appreciated) for common shares of a large Canadian public company ("Inco"), with the result that the taxpayer's shareholding in DFR was reduced below 10%. This result positioned the taxpayer to clearly fit within an exemption from Canadian capital gains tax under Article XIII of the Canada-Luxembourg Income Tax Convention (the "Treaty") on a subsequent disposition of that block of shares once the taxpayer became resident in Luxembourg. In July 1995, the taxpayer was continued into Luxembourg, in August 1995 the taxpayer sold its shares of Inco and in August 1996 it sold its DFR shares to Inco.
In rejecting the submission of counsel for the Crown that the claiming of exemption under the Treaty on the August 1996 sale represented an abuse or misuse, Pelletier, JA stated (at para. 6-7):
"It is clear that the Act intends to exempt non-residents from taxation on the gains from the disposition of treaty exempt property. It is also clear that under the terms of the Tax Treaty, the respondent's stake in DFR was treaty exempt property. The appellant 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.
If the object of the exempting provisions was to be limited to portfolio investments, or to non-controlling interests in immoveable property (as defined in the Tax Treaty [including real estate company shares]), as the appellant argues, it would have been easy enough to say so. Beyond that, and more importantly, the appellant was unable to explain how the fact that the respondent or Mr. Boulle had or retained influence or control over DFR, if indeed they did, was in itself a reason to subject the gain from the sale of the shares to Canadian taxation rather than taxation in Luxembourg."
The Court also summarily dismissed an argument that the Treaty should not be interpreted so as to permit "double non-taxation", i.e., a result where there was no income tax under the laws of either jurisdiction.