Canada: Velcro Canada Inc. v. The Queen: Riding Prévost Car To Victory

Last Updated: April 12 2012
Article by John C. Yuan

Most Read Contributor in Canada, September 2018

In the tax world, "treaty-shopping" occurs when a person resident in Country A organizes a legal entity in, and directs income through, Country B, solely to secure benefits under a tax treaty between Countries B and C that would not be available to a resident of Country A, typically preferential tax treatment for income sourced from Country C.

In recent years, tax administrations around the world, including Canada, have addressed this concern by adding limitation of benefits articles to existing tax treaties to deny treaty benefits when certain criteria are met. However, when a tax treaty does not include a limitation of benefits clause, the primary tool for challenging treaty shopping in the context of non-resident withholding tax is to assert that the person claiming the treaty benefits is not the "beneficial owner" of the relevant income, as preferential withholding tax rates under tax treaties that follow the OECD Model Convention typically only apply where the income recipient is also the beneficial owner of such income.

In Canada, Prévost Car Inc. v. The Queen,1 (Prévost Car) was the first case to consider whether tax treaty benefits should be denied on the basis that the non-resident recipient of the Canadian-sourced income was not the beneficial owner. In Prévost Car, the income consisted of dividends paid on shares of a Canadian corporation to a Dutch holding company established and jointly owned by an English corporation and a Swedish corporation. In 2008, the Federal Court of Appeal (FCA) affirmed the Tax Court of Canada's decision to afford the Dutch holding company the benefits of the reduced withholding rates on Canadian-sourced dividend income under the Canada-Netherlands tax treaty, even though the shareholders of the Dutch holding company had established an operating structure that had ensured at least 80% of the Dutch holding company's income was distributed as a dividend to shareholders and where the favourable Canada-Netherlands tax treaty was a factor in establishing the Dutch holding company in the Netherlands.

A key feature of the Tax Court's decision in Prévost Car was its conclusion that the relevant question with respect to beneficial ownership is whether the dividend recipient is the "person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received."

The Prévost Car case provided judicial guidance on how the beneficial ownership question would be resolved with respect to dividends. Undeterred, the minister of national revenue (Minister) then chose to litigate the same issue in a royalty context in Velcro Canada Inc. v. The Queen,2 (Velcro Canada), which was recently decided by the Tax Court of Canada in the taxpayer's favour.

In the Velcro Canada case, intellectual property owned by a Dutch company (IPco) in the Velcro worldwide group of companies was licensed to Velcro Canada Inc., commencing in 1987. The license provided that IPco was to receive a specified percentage of Velcro Canada's "net sales." Initially, the percentage depended on whether the sales were attributable to products using established technology (5%) or new technology (7.5%), but the royalty entitlement was amended in 2003 to reflect a flat 5% rate.

In 1995, as part of a strategic worldwide reorganization of the Velcro group, IPco migrated from the Netherlands to the Netherlands Antilles. Prior to its migration, IPco assigned its rights under the license agreement with Velcro Canada, a Dutch holding company (Dutchco) and gave Dutchco the right to grant licenses in respect of IPco-owned intellectual property.

Under the agreements effecting the assignment, IPco was entitled to receive royalties from Dutchco computed similarly to royalties payable under the license with Velcro Canada; until 2003, IPco received an "arm's length percentage" of Velcro Canada's net sales (as defined under the assigned Velcro Canada license) and, beginning in 2003, IPco received the royalties that Dutchco collected under the Velcro Canada license, less the amount approved by the Dutch tax authorities to cover Dutchco's costs related to its obligations under the assignment agreement.

Over the period that the assignment was in place, IPco received approximately 90% of the royalties that Dutchco collected under the Velcro Canada license.

The assignment of the royalty stream by IPco to Dutchco in 1995 did not reduce the Canadian withholding tax from the situation before IPco's migration. However, IPco's assignment of the Velcro Canada license to Dutchco allowed the Canadian-source royalty stream to continue enjoying the benefits of the Canada-Netherlands treaty despite IPco's migration to a jurisdiction that did not have a tax treaty with Canada (i.e., Netherlands Antilles).

The Tax Court framed its analysis in the Velcro Canada case using the concept of beneficial ownership that had been previously expressed in Prévost Car. It went so far as to start with dictionary definitions of the four key words in the judge-made test: "possession," "use," "risk," and "control". The Tax Court then went on to consider whether Dutchco had enjoyed the incidents of beneficial ownership under the Prévost Car standard.

With respect to possession and use, Dutchco did not simply collect and immediately forward to IPco a 90% share of the royalties collected from Velcro Canada. Rather, the funds were comingled with Dutchco's funds from other sources and sometimes converted into a different currency. Amounts that Dutchco held in its accounts earned interest income for Dutchco's benefit and were applied to pay Dutchco's expenses. In light of those facts, it was clear to the Tax Court that Dutchco had both possession and use of the Velcro Canada royalties based on a strict tracing analysis.

With respect to risk, the Tax Court noted that Dutchco had assumed some conventional commercial risks with respect to the royalties. Since the assignment agreement did not provide Dutchco with indemnification from IPco for those risks, it was clear to the Tax Court that Dutchco was exposed to risk in relation to the Velcro Canada royalties.

Having come to the view that Dutchco had had possession and use of the funds and had been exposed to commercial risk in respect thereof, the Tax Court concluded that Dutchco also had control over the collected Velcro Canada royalties and therefore each of the four criteria from the Prévost Car formulation of beneficial ownership had been met.

The Tax Court then quickly dismissed the Minister's arguments that Dutchco was merely IPco's agent, nominee or conduit to flow the royalties from Velcro Canada to IPco.

In the end, it would appear that the Prévost Car and Velcro Canada cases establish a fairly high threshold for the Minister to meet in order to successfully deny treaty benefits on the basis that the recipient of dividends and royalties is not the beneficial owner of these amounts.

In the absence of a fact situation in which the flow of funds (on a direct tracing basis) is pre-determined and the recipient of the funds has no discretion whatsoever on how the funds are handled or applied, it is difficult to see how a court could find in favour of the Minister on future beneficial ownership cases.

Perhaps the practical outcome of this case is that Canadian tax authorities will shift their focus from trying to use the courts to challenge structures that offend its view of when tax treaty benefits will apply and instead focus on ensuring that the language in Canada's bilateral tax treaties more clearly describes the circumstances under which treaty benefits would not be available. This is the approach that the Canadian government adopted when it renegotiated the Canada-U.S. tax treaty, which now contains a limitation of benefits article.

It should be noted that both Prévost Car and Velcro Canada discussed in some detail the OECD Model Convention (upon which the Canada-Netherlands tax treaty is based) and the Commentary thereon with respect to beneficial ownership and conduits.3 In Prévost Car, the FCA noted that the Minister's position on beneficial ownership in that case was, in effect, asking the Court to adopt a pejorative view of holding companies which neither Canadian domestic law, the international community nor the Canadian government through the process of objection to the OECD Model Convention have adopted.

The OECD has recently4 issued proposed changes to the Commentary on beneficial ownership, aiming to clarify the interpretation that should be given to that concept in the OECD Model Convention and, in particular, whether the interpretation should reflect what beneficial ownership has meant historically or a broader anti-abuse concept. Based on recent comments by the U.S. delegate, consensus among the OECD members on this issue has been a challenge to date.5


1 Prévost Car Inc. v. The Queen, 2008 TCC 231, aff'd 2009 FCA 57

2 Velcro Canada Inc. v. The Queen, 2012 TCC 57, released February 24, 2012

3 Organization for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital (1977) and 2003 Commentary, as well as the OECD Conduit Companies Report (1986)

4 Clarification of the Meaning of "Beneficial Ownership" in the OECD Model Convention, discussion draft dated 29 April 2011 to 15 July 2011

5 Jesse Eggert on March 1, 2012 at the International Fiscal Association USA 2012 annual conference, as summarized in Tax Analysts, March 2, 2012

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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