Taxation law

Consultation Paper on Tax Treaty Shopping Released by Canadian Government

Sep 4th, 2013

By Steven Sitcoff

Further to an announcement in the 2013 federal budget, the Canadian Department of Finance released a consultation paper (the “Paper”) on August 12, 2013 seeking commentary on proposed anti-treaty shopping measures.

In essence, the perceived abuse in this regard occurs where a non-resident of Canada interposes an intermediary entity formed in a country which has a tax treaty with Canada in order to indirectly access treaty benefits which would otherwise be unavailable to the non-resident.

The Canadian tax authorities have long taken a dim view of treaty shopping.  The Paper recognizes that, in light of setbacks in recent Canadian court cases dealing with this matter, a more formal and targeted approach is warranted in order to compensate for the perceived inadequacy of existing measures.  In that vein, the Paper sets out a series of specific questions for comment in the interests of evaluating various potential countermeasures.

The Paper appears to favour taking a unilateral approach without the involvement or concurrence of other countries, which means striking a delicate balance in order not to create a conflict between Canada’s domestic law and its obligations under various tax treaties.  For example, the Paper notes that it would be easier and quicker to introduce anti-treaty shopping measures through domestic legislation rather than through tax treaties, as the latter would require a lengthier process of seeking and obtaining the agreement of treaty partners.  Also, it is proposed that such legislation should expressly prevail over any contrary provisions in Canada’s tax treaties.  Another question addresses how such legislation should apply where applicable tax treaties already contain anti-treaty shopping measures, noting that such a domestic overlay could be unnecessary in certain instances.

The Paper also appears to favour a general approach (e.g., in the form of a main purpose test) over a specific one (along the lines of the limitation-on-benefit provisions in many US tax treaties, including that with Canada).  The Paper recognizes that the risk of introducing provisions which are overly broad in scope, which is especially inherent in using a general approach, could be remedied by including express exceptions and/or a referral process to tax authorities to seek relief where appropriate.

A number of considerations will no doubt be raised as part of the consultation process, including proposals for safe harbour and grandfathering provisions, and the necessity of properly designed exceptions and other approaches so as to avoid an overly mechanical application of the proposed measures in unintended circumstances, especially with regard to planning structures that have consistently been accepted by the Canadian tax authorities.

Submissions are requested by December 13, 2013. You can read the consultation paper by clicking on this link.

Steven Sitcoff is a tax lawyer at Spiegel Sohmer who has experience with a variety of corporate and personal income tax matters, including voluntary disclosures to the federal and provincial tax authorities.