On April 10, 2014, TEI President Terilea Wielenga filed comments with Canada's Minister of Finance Joe Oliver on the 2014 Budget Proposals. TEI's comments were prepared by its Canadian Income Tax Committee, whose chair is Bonnie Dawe of Finning International. Contributing substantially to the development of TEI's comments were Carolyn Mulder of Wal-Mart Canada, Corp. and Jason Vincze of General Electric Canada. Also contributing to the comments were Giovanna Baragetti of Hydro One Networks, Inc. and Lynn Moen of Walton Global Investments, Ltd. Jeffery P. Rasmussen of TEI's legal staff coordinated preparation of the comments.
On February 11, 2014, the Government announced its 2014 Budget, which sets forth numerous tax measures and describes other proposals for new legislation. On behalf of Tax Executives Institute (TEI), I am writing to express our comments and concerns about the Government's proposals relating to treaty shopping and certain back-to-back loans. We believe both proposals are overbroad, will interfere with legitimate commercial arrangements and transactions, and will impede investments in Canada or financing for such investments.
Background on Tax Executives Institute
TEI is the preeminent international association of business tax executives. The Institute's nearly 7,000 professionals manage the tax affairs of more than 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute approximately 15 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver. TEI members must contend daily with the planning and compliance aspects of Canada's business tax laws, including its treaties. Many of our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities and investments in Canada. The comments set forth in this letter reflect the views of TEI as a whole, but more particularly those of our Canadian constituency.
TEI concerns itself with important issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit. In furtherance of this goal, TEI supports efforts to improve the tax laws and their administration at all levels of government. We believe that the diversity, professional training, and global viewpoint of our members enable us to bring a balanced and practical perspective to the issues raised by the treaty shopping and back-to-back loan proposals.
The 2014 Budget announcement follows up on the Government's 2013 Budget proposal and the Department of Finance's August 2013 consultation document on treaty shopping. TEI was pleased to participate in the Department's consultation, filing comments in December 2013 urging the Department "to conduct a comprehensive study of the scope and extent of treaty shopping in Canada and ... quantify the perceived fiscal loss." We suggested that implementing concrete legislation "before knowing the scope of the [perceived treaty abuse] problem may cause the remedy to be simultaneously over- and under-inclusive and thus be both wholly ineffective and impair legitimate investments." We regret that the 2014 Budget sets out proposals for draft legislation before the scope of the perceived treaty abuse problem has been quantified and disclosed.
TEI agrees that the availability of treaty tax benefits should be curtailed in abusive transactions or investment structures. At the same time, the objective of tax treaties is to encourage trade and investment. If access to treaty benefits is to be denied, the effort can only be effective if done in a manner that ensures certainty, fairness, and simplicity for taxpayers and ease of administration for the Canada Revenue Agency (CRA). To that end, we strongly recommend that Canada adopt the approach of negotiating objective Limitation on Benefits (LOB) clauses in particular treaties rather than enacting a general and amorphous anti-treaty-abuse provision in its domestic legislation. (1) Negotiating an objective LOB provision with treaty partners will increase taxpayer certainty because the provisions can define the qualified persons to which benefits should be accorded and set out the conditions that warrant access to, or denial of, the treaties' benefits. If instead the Government proceeds with its proposed domestic anti-abuse legislation denying access to treaties where "one of the main purposes" is obtaining tax benefits, the scope, degree, and frequency of disputes with CRA will be heightened, thereby increasing the administrative costs for both the Government and taxpayers and undermining the trade and investment objectives of the treaties. As important, "under the principles of public international law, as codified in Articles 26 and 27 of the Vienna Convention on the Law of Treaties, if the application of a domestic anti-abuse rule has the effect of allowing a State that is a party to a tax treaty to tax an item of income that [the] State is not allowed to tax under the provisions of the treaty, the application of the domestic anti-abuse rule would conflict with the provisions of the treaty and those treaty provisions should prevail." (2) Hence, the courts might ultimately be unwilling to enforce a domestic legislative override of Canada's treaties.
The Proposed Anti-Treaty-Abuse Rule
The proposal includes four principal elements: a general "main purpose provision," a conduit presumption, a safe harbour presumption, and a relieving provision. We have comments in respect of each element.
Main Purpose Provision
Subject to the relieving provision, treaty benefits will not be available "if it is reasonable to conclude that one of the main purposes" for undertaking the relevant transaction (or series of transactions) is to obtain a treaty benefit.
The phrasing of the test is problematic because it suggests that a taxpayer may have multiple "main" purposes even though the word "main" means chief or principal. Hence, it is unclear how a taxpayer or CRA is to determine the relevance of a particular purpose or whether that purpose is a "main purpose." The...