TEI comments on Canada's treaty shopping consultation: December 16, 2013.

• Position: Tax Executives Institute

On December 16, 2013, Institute President Terilea J. Wielenga submitted comments on behalf of TEI to the Department of Finance, Canada, in respect of its consultation on treaty shopping. The comments were prepared under the aegis of the Institute's Canadian Income Tax Committee, whose chair is Bonnie Dawe of Finning Corporation. Others contributing to the submission in addition to Ms. Dawe were: Carmine A. Arcari of Royal Bank of Canada, Lynn Moen of Walton International Group, Inc., and Jason Vincze of GE Canada. Jeffery P. Rasmussen of TEI's legal staff coordinated the preparation of the comments.

On August 14, 2013, the Department of Finance launched a consultation on treaty shopping in Canada. A position paper, Treaty Shopping--The Problem and Potential Solutions, was released describing the perceived problem and outlining a range of approaches that the Canadian government might undertake to address the practice of treaty shopping. In addition, the paper highlights Canada Revenue Agency's (CRA's) efforts to curb treaty shopping under current rules. Finally, the paper sets forth a series of questions and issues on which the Government of Canada is soliciting stakeholder input. On behalf of Tax Executives Institute (TEI), I am pleased to provide the following comments on the Department's consultation on treaty shopping and how the government might address it.

Background on Tax Executives Institute

TEI is the preeminent international association of business tax executives. The Institute's 7,000 professionals manage the tax affairs of 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute nearly 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 consultation on treaty shopping.

Consultation Background

As defined in the consultation paper, "treaty shopping" refers to a situation where a person who is not entitled to the benefits of a tax treaty uses an intermediary entity that is entitled to such benefits in order to indirectly obtain those benefits. Canada has found treaty shopping where all the following circumstances exist:

* An entity ("intermediary entity"), resident in a country with which Canada has a tax treaty, claims the application of the tax treaty to obtain a reduction of Canadian tax otherwise payable on income earned in Canada;

* The intermediary entity is owned or controlled mainly by residents of an other country which are not entitled to at least the same treaty benefits ("third country residents");

* The intermediary entity pays no or low taxes in its country of residence on the item of income earned in Canada (taking into account deductible amounts paid to third country residents and other relevant aspects of the tax system in the country where the intermediary is resident); and

* The intermediary entity does not carry on real and substantial business activities (other than managing investment income) in its country of residence.

Where this combination of circumstances is found, the paper avers, there is strong evidence that one of the main purposes of the intermediary entity is to receive income on behalf of third-country residents. Canada believes it would be justified in denying tax treaty benefits because the benefits are claimed by an intermediary entity lacking economic substance and a bona fide purpose and the ultimate beneficiaries are third-country residents not entitled to claim the benefits directly. The balance of the paper discusses whether rules to combat treaty shopping should be part of Canada's treaties or domestic laws and whether the rules should be general or specific.

General Comments

Treaty Limitation on Benefit Provisions Should be the Favoured Approach Rather Than Domes tic Legislation. The threshold question posed by the consultation paper is whether treaty shopping rules should be included in Canada's domestic tax laws or whether Canada should continue to negotiate treaty-based rules. On a first principles basis, TEI believes that a treaty-based response to the perceived problem of treaty-shopping is the better approach. Treaties are agreements entered into between the countries after an extended course of detailed negotiations. Hence...