Canada: Improving Access To Tax Treaties by Collective Investment Vehicles

On December 9, 2009, the Organisation of Economic Co-operation and Development (OECD) released a Report containing proposed changes to the Commentary on the OECD Model Tax Convention dealing with the question of the extent to which collective investment vehicles (CIVs or, in Canadian terms, mutual funds) or their investors are entitled to treaty benefits on income received by the CIVs. This note summarizes the Report and its significance to Canadian mutual funds.

For the purposes of the Report, a CIV is a fund that is widely held, invests in a diversified portfolio of securities, and is subject to investor-protection regulation in the country in which it is established. The term includes "fund of funds" that achieve diversification by investing in other CIVs; it does not include private equity funds, hedge funds and REITs. One example of a CIV is a Canadian mutual fund governed by National Instrument 81-102 of the Canadian securities administrators.

The Model Tax Convention is the basis on which approximately 3,000 bilateral tax treaties have been negotiated worldwide. It contains provisions that address the allocation of taxing authority between the Contracting State in which income (interest, dividends and gains) arise and the Contracting State in which the owner of that income is resident (for example, by restricting the rate of withholding tax on interest and dividends imposed by the country in which the income arises).

The Model Tax Convention does not contain specific rules applicable to CIVs. Therefore, as a general rule, under a tax convention that is based on the Model Tax Convention, a CIV will only be entitled to treaty benefits if it is considered to be a "person" that is a "resident of a Contracting State" and, in the case of interest and dividends, the "beneficial owner" of such income. It is the position of the Canadian mutual fund industry that a Canadian mutual fund trust or mutual fund corporation satisfies each of these requirements and should be entitled to treaty benefits. That is, a trust or corporation is a "person," is liable to tax on its worldwide income under the Income Tax Act (Canada)(ITA), although as a practical matter it generally pays no tax by reason of provisions of the ITA permitting refunds if appropriate distributions are made to investors, and it is the beneficial owner of such income. In the past, some European countries have taken the position that some or all of these conditions are not satisfied by Canadian mutual funds, although the outcome of bilateral discussions has generally been favourable. The position of Canadian mutual funds can be contrasted with the position of certain European funds (e.g., fonds communs de placement in Luxembourg) that are contractual arrangements under which the condition that the CIV be a "person" is not met and with the position of other structures where the CIV is exempt from tax (and cannot be treated as a "resident of" a Contracting State). From a policy perspective, this is an inappropriate result as economically similar CIVs are afforded different tax treatment.

A complication that arises with respect to the treatment of CIVs is the concern that investors resident in a third country that does not have a treaty with the state in which the income arises will access treaty benefits by investing in a CIV that is resident in a country that does have such a treaty. This would generally not be of concern where the country in which the CIV is resident imposes a material withholding tax on distributions to non-resident investors (as would be the case in the United States, and perhaps to a lesser extent, in Canada) but would be of concern where the country in which the CIV is resident does not impose such a tax (Luxembourg, for example).

The Report proposes additions to the Commentary to the Model Tax Convention to address these concerns.

It contemplates that treaty negotiators expressly address the treatment of CIVs even where it is clear that CIVs of both Contracting States would be entitled to benefits. In such a case, the treaty or an exchange of notes could acknowledge the entitlement of CIVs to treaty benefits.

In other cases, if treaty entitlement would not technically be available, the negotiators should include an express provision in the treaty that a CIV established in a Contracting State be treated, for the purposes of applying the treaty, as if it were an individual resident in the country in which it is established and as if it were the beneficial owner of its income ─ but only to the extent that "equivalent beneficiaries" are owners of the shares or units of the CIV. "Equivalent beneficiaries" are residents of the country in which the CIV is established, or residents of other countries with which the country in which the income arises has a tax treaty providing for a withholding rate at least as low as that in the treaty under consideration. Countries would need to agree on methods by which the relevant percentages of shares or units of the CIV owned by equivalent beneficiaries could be determined. It is anticipated that further guidance will be forthcoming from the OECD in this regard. The recognition of equivalent beneficiaries is particularly significant for Luxembourg, Ireland and, to a lesser extent, the United Kingdom, which have significant numbers of third-country investors in their funds.

The Report recognizes that as treaties are bilateral, rather than multi-lateral, some countries would limit benefits to owners of the relevant income that are residents of the country in which the CIV is established rather than adopt the equivalent beneficiary concept.

The Report also contemplates that, if an agreed percentage of interests are owned by equivalent beneficiaries, the Contracting States may agree that the CIV should be entitled to full benefits under the treaty rather than proportional benefits.

In other cases, the Report contemplates that countries may wish to permit CIVs to make claims for treaty relief on behalf of investors that are entitled to such benefits. This could be the case where investors are pension funds that, if they had invested directly, would have been entitled a zero rate of withholding on interest and dividends. It is noted that "transparency" could also be achieved in many cases by using an appropriate investment vehicle such as a limited partnership.

Finally, the Report contemplates that a CIV be treated as entitled to full treaty benefits if the principal class of shares or units of the CIV is listed and regularly traded on a regulated stock exchange in the Contracting State in which the CIV is established. This would address exchange-traded funds.

If adopted, the changes to the Model Tax Convention and resulting changes flowing therefrom should be helpful, or at least not harmful, for the entitlement of Canadian mutual funds to treaty benefits. An interesting question is whether, if Canada's treaty negotiators include an express provision in new treaties addressing CIVs, any negative inferences might arise about earlier treaties that are silent in this regard. We think not, but it is an issue to be considered.

The Report is available on the OECD website (

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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.


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.