In Prévost Car Inc. v. The Queen, the Minister of National Revenue argued that the Canadian corporate taxpayer's parent, a Dutch holding company, was a conduit and not the "beneficial owner" of dividends paid to it by the taxpayer. Therefore, it was not entitled to a reduction in the 25% rate of Canadian non-resident withholding tax to 5% under Article 10(2) of the Canada-Netherlands Income Tax Convention (the "Treaty"). The term "beneficial owner" is not defined in any of Canada's tax treaties. In a judgment released by the Tax Court of Canada on April 22, 2008, the Court rejected the Minister's argument, holding that the Dutch parent was the beneficial owner of the dividends within the meaning of Article 10(2) of the Treaty as it enjoyed all the attributes of ownership over the dividends, it was not a conduit for its shareholders, and it was not legally obligated to pay out the dividends it received to its shareholders either under Dutch law, its Deed of Incorporation or the dividend policy provided in the Shareholders' Agreement between its shareholders.
The Tax Court held that the "beneficial owner" of dividends within the meaning of Article 10(2) of the Treaty is "the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend[s] he or she received". Furthermore, in analyzing beneficial ownership in a corporate context, the Tax Court concluded that the corporate veil can only be pierced where the corporation is a conduit for another person and either it has no discretion with respect to the use or application of funds put through it as conduit, or it has agreed to act on another person's behalf pursuant to that person's instructions without any right of independent action. While the taxpayer has won the first round, it is expected that the Minister will appeal the Tax Court's decision to the Federal Court of Appeal.
The full text of the decision can be viewed on the Tax Court's website at: http://decision.tcc-cci.gc.ca/en/index.html
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