Canada: Taxpayer Wins "Beneficial Ownership" Case: Velcro Canada Inc. v. The Queen

The Tax Court of Canada recently allowed the taxpayer's appeal in Velcro Canada Inc. v. The Queen.  The issue on appeal was whether a Dutch company was the beneficial owner of royalties paid to it by a Canadian taxpayer for purposes of the Canada-Netherlands Income Tax Convention (the Treaty), despite the Dutch company having an obligation to pay a further royalty, in an amount equal to 90% of the royalties received from Canada, within 30 days to an affiliate in the Netherlands Antilles.  The court held that the Dutch company was not a mere conduit for the Netherlands Antilles company as had been alleged by the Crown.  This decision is important as it provides further clarification of the circumstances under which taxpayers may arrange for payments to be made to a company in a treaty jurisdiction without loss of treaty relief for Canadian sourced payments.  In particular, the decision extends the guidance regarding beneficial ownership provided by the Federal Court of Appeal in Prévost Car Inc. v. The Queen1 (see our Osler Update dated March 2, 2009) – a case which had considered clearly discretionary payments (dividends) – to contractually mandated payments such as interest or royalties.

Background Facts

In 1987, Velcro Industries BV (Velcro Industries) entered into a licence agreement with Velcro Canada Inc. (Velcro Canada), granting Velcro Canada the right to use Velcro Industries' intellectual property to manufacture and sell fastening products in exchange for royalty payments (the Licence Agreement).  At the time, Velcro Industries was a resident of the Netherlands. From 1987 to October 1995, Velcro Canada paid royalties to Velcro Industries and withheld Canadian tax at the applicable 10% rate under the Treaty, rather than the 25% rate that would apply absent any treaty relief.

The Velcro group of companies underwent a reorganization on October 26, 1995, resulting in Velcro Industries becoming a resident of the Netherlands Antilles, a country with which Canada did not have an income tax treaty.   The next day, Velcro Industries assigned its rights and obligations under the original Licence Agreement to Velcro Holdings BV (Holdings), a subsidiary resident in the Netherlands. Under an assignment agreement, Holdings was assigned the right to grant licenses for Velcro Industries' intellectual property to Velcro Canada and to receive royalties from Velcro Canada. Holdings would pay Velcro Industries an arm's length percentage of net sales of the licensed products, which represented approximately 90% of the royalty payments received from Velcro Canada, within 30 days of receiving royalty payments from Velcro Canada.  The ownership of the intellectual property remained with Velcro Industries.

Velcro Canada withheld tax from royalty payments to Holdings at a rate of 10% pursuant to the Treaty until December 1998, when the royalty rate was changed to zero. The CRA assessed Velcro Canada for failing to withhold and remit withholding tax of 25% of the royalties paid to Holdings, during the 1996 – 2004 taxation years. The taxpayer appealed.

The Crown argued that Velcro Industries, the Dutch Antilles resident, rather than Holdings, the Dutch resident, was the beneficial owner of the royalties from Velcro Canada between 1996 and 2004, thereby disentitling Holdings to the reduced royalty rate under the Treaty. The taxpayer's position was that Holdings was the beneficial owner of the royalties.

Decision of the Tax Court of Canada

Associate Chief Justice Rossiter turned to Chief Justice Rip's definition in Prévost of the "beneficial owner" of income as the person who receives the income for his or her own use and enjoyment and assumes the risk and control of the income he or she received.  Rossiter A.C.J. distilled four elements from Prévost to consider in determining where beneficial ownership lies: (a) possession; (b) use; (c) risk; and (d) control. He also repeated Rip C.J.'s comments in Prévost that a court is not likely to pierce the corporate veil unless the corporation has "absolutely no discretion" with regard to the use and application of the funds.

Rossiter A.C.J. concluded that the taxpayer demonstrated it was the beneficial owner of the royalties on each of the four elements. Although the reasons pointed to a number of factors, the court relied on the following main factors: Holdings (not Velcro Industries) had the legal right to receive the royalties from Velcro Canada; the funds paid as royalties by Velcro Canada were deposited in an account owned by Holdings over which it had exclusive possession and control; such funds were comingled with other monies in Holdings' accounts and not held in a separate account; Holdings converted the funds from Canadian to US dollars to pay Velcro Industries (exposing itself to currency fluctuation risk); the money earned interest belonging to Holdings; Holdings did not have to seek instructions in dealing with the funds; and the amount of the royalty payments received from Velcro Canada differed from the amount paid by Holdings to Velcro Industries. 

The fact that the royalty payments were comingled with other money in Holdings' accounts (derived for example from Holdings' lending activities) weighed heavily in the taxpayer's favour because, according to the court, this gave Holdings discretion in the use of the funds. In Rossiter A.C.J.'s opinion, this meant that the funds could be used by Holdings in any way it saw fit – whether to make loans, invest, or make payments on other legal obligations. The royalties were treated as assets listed on Holdings' financial statements, making them available to creditors, with no priority given to Velcro Industries as a creditor. Another corollary of comingling was that although Holdings was obligated to pay 90% of the royalties to Velcro Industries, the funds actually paid were not necessarily the same funds received, meaning there was no automatic flow of specific funds because of the discretion of Holdings with respect to the use of those funds. The other 10% was subject to the discretionary use, enjoyment and control of Holdings. 

Applying guidance found in the Commentary to the OECD Model Tax Convention on Income and on Capital (the Commentaries), Rossiter A.C.J. then considered whether Holdings acted as an agent, nominee or conduit in respect of the royalties from Velcro Canada.  He concluded that Holdings did not have the capacity to affect the legal position of Velcro Industries, and therefore was not its legal agent.  Holdings was not a nominee because it acted on its own account at all times subject to the assignment agreements. Lastly, in order to find that Holdings was a conduit of Velcro Industries, the court would have to find that Holdings had absolutely no discretion with respect to the funds, as set out by Prévost. Rossiter A.C.J. concluded that the limited discretion which Holdings did exercise in respect of the funds prevented the court from piercing the corporate veil.

Implications of the Decision

In Velcro Canada, Rossiter A.C.J. stated that in cases where the issue is whether a treaty resident company is a mere conduit, rather than the beneficial owner of Canadian source payments, "one must take a close look at where the right to use and the enjoyment and assumption of risk and control of the payments lie".  The decision itself is helpful in both distilling such elements of the beneficial ownership concept as possession, use, risk and control and providing a helpful road map as to how one takes a nuanced and "close look" at the legal and commercial facts relevant to the location of those elements.  The decision further clarifies the Canadian approach to cases involving the selective use of treaty resident entities to receive Canadian sourced payments of dividends, interest or royalties.   Specifically, the case clarifies that: 

  • Where a treaty resident is contractually obligated to make a further payment in connection with a prior Canadian sourced payment, such a contractual obligation is not necessarily tantamount to the type of "automatic flow of funds" that could result in the treaty resident entity not being the beneficial owner of the Canadian sourced payment;
  • An intermediary entity in a back-to-back arrangement does not need to have unfettered discretion with respect to what it can do with a payment from Canada; limited discretion can suffice for beneficial owner status; and
  • as stated in Prévost, neither Canadian domestic law, the international community nor the Canadian government through the process of objection to OECD materials have adopted a pejorative view of holding companies established in favourable treaty countries; as noted by the court, the OECD Conduit Report warned of the dangers of readily looking through corporations which is "incompatible with the principle of the legal status of corporate bodies, as recognized in the legal systems of all OECD Member countries".2 

Unless reversed on appeal, Velcro Canada represents yet another loss of a "treaty shopping" case by the Crown, and would seem to highlight the limitations of attempting to use the beneficial ownership concept as a broad anti-avoidance rule to address perceived treaty shopping arrangements.  Instead, it would appear that countries should negotiate specific limitation on benefits provisions to the extent that they intend for treaty benefits to be limited to particular classes of taxpayers. 

However, taxpayers should continue to exercise caution in this area for a number of reasons.  First, in 2011 the OECD published proposed amendments to the Commentaries' interpretation of "beneficial ownership" that look for "the full right to use and enjoy the [income] unconstrained by a contractual or legal obligation to pass the payment received to another person." 3  This proposed formulation of the "beneficial ownership" test, if accepted by Canada and other countries, would be more difficult to satisfy than the one applied in Velcro Canada.  Second, not all taxpayers implementing back-to-back arrangements will have the benefit of an intermediary treaty entity like Holdings, with multiple sources and uses of funds.  In the case of a single-purpose vehicle, it may be more difficult to break the equation insisted on by the Crown in Velcro Canada between a contractual obligation to make further payments based on Canadian source payments and an "automatic flow of funds".  Finally, there are other tools at the CRA's disposal to combat treaty shopping, including Canada's statutory general anti-avoidance rule (GAAR).  In 2007, in MIL (Investments) S.A. v. The Queen, the Federal Court of Appeal held that GAAR did not apply to deny treaty benefits to a Cayman Islands company continued into Luxembourg for purposes of (among other things) taking advantage of the favourable capital gains article in Canada's treaty with Luxembourg.   However, there is a case currently before the Supreme Court of Canada (commonly known as Garron) that, depending on the outcome, may provide greater traction for GAAR-based challenges of treaty shopping arrangements.4  Taxpayers should monitor further judicial and administrative developments relating to the use of treaty-based holding company structures, and to apply existing case law to their own facts with due regard for the facts considered relevant by the courts in the earlier decisions.  Osler's international tax specialists are well-placed to advise on such matters.


1 2009 DTC 5053 (FCA), affirming 2008 DTC 3080 (TCC).

2 OECD, "Double Taxation Conventions and the Use of Conduit Companies" (OECD, Paris, 1987), at paragraph 24(i).

3 OECD, "Clarification of the Meaning of 'Beneficial Owner' in the OECD Model Tax Convention" (Paris: OECD, 29 April 2011 to 15 July 2011).

4 St. Michael Trust Corp. v. The Queen, 2010 FCA 309, affirming Garron et al. v. The Queen, 2009 TCC 450.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions