The Canadian federal government has been concerned for some time
about "treaty shopping" by non-residents – the
practice of non-residents not residing in a treaty country
interposing a treaty resident entity between it and a Canadian
source of income. On August 29, 2014 the Canadian government
shelved its proposal for a domestic treaty shopping rule pending
recommendations from The Organization for Economic Co-operation and
Development (OECD). On September 16, 2014 the OECD will release
its first recommendations on the prevention of treaty shopping.
Shopping". Canada has negotiated tax treaties with a
number of countries providing for a reduction or elimination of
Canadian withholding tax on payments such as interest, dividends,
royalties, and management fees, and for the elimination of Canadian
income tax on certain types of gains or business income.
However, a non-resident whose country of residence does not have a
tax treaty with Canada could obtain the benefit of a tax treaty by
interposing an intermediary (such as a corporation) that is
resident in a country with a favourable tax treaty between it and
the Canadian source of income. Accordingly, the tax benefits
of a tax treaty would be indirectly available to the non-resident
investor simply by earning the income through the
Ever since the 2008 financial crisis, the G20 has expressed concern
about multinational enterprises paying too little corporate tax by
employing complex tax planning strategies. The OECD answered
the G20's siren call by studying and recommending measures to
prevent "base erosion and profit shifting" (BEPS).
One area the OECD is studying is the abuse of tax treaties as
outlined in action item 6 of the OECD's July 19, 2013 "Action Plan on Base
Erosion and Profit Shifting".
Despite the OECD's work, on August 12, 2013 the Canadian
government released a Consultation Paper on Treaty
Shopping seeking feedback on a domestic treaty shopping
rule. On February 11, 2014 – after the consultation period
closed – the Canadian government included a proposal for a
domestic treaty shopping rule in its 2014 federal budget. The
proposal met with a great deal of resistance, especially since the
government drafted it without the benefit of the OECD's final
recommendation on how to address abusive treaty shopping.
Thankfully, the federal government has agreed to shelve its
proposal for now and wait until the OECD has completed its
work. The federal government's August 29, 2014 news
release accompanying its draft tax legislation to implement the
2014 federal budget contains this statement from the Canadian
Department of Finance: "[a]fter engaging in
consultations on a proposed anti-treaty shopping measure, the
Government will instead await further work by the Organisation for
Economic Co-operation and Development and the Group of 20 (G-20) in
relation to their Base Erosion and Profit Shifting
OECD Recommendations. On September 16, 2014 the
OECD will release its recommendations dealing with the first seven
action items – including treaty shopping – set out in
its Action Plan to combat international tax
avoidance by multinational enterprises. The OECD will live stream
the newscast of its recommendations, followed by a technical
briefing via webcast on the BEPS deliverables. Full details of the
OECD's release and the technical briefing are
available on the OECD website.
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