C&W Offshore – Tax Court of Canada finds that under a back-to-back rental arrangement, the immediate payee of the rentals was their beneficial owner

The Canadian taxpayer (“C&W Offshore”) subleased mooring chains from an arm's length UK company (“InterMoor UK”), which, in turn, leased the chains from its Norwegian affiliate (“InterMoor Norway”).

The Canada-UK Treaty included rentals for commercial or industrial equipment in its definition of royalties, whereas royalties under the Canada-Norway Treaty did not extend to such rentals, so that if InterMoor Norway had leased the chains directly to C&W Offshore, they would have been exempted from Canadian Part XIII tax under the Canada-Norway business profits article. C&W Offshore argued that InterMoor Norway was the beneficial owner of the royalties paid by C&W Offshore, and that the “mark-up” on the sublease from InterMoor UK represented a processing fee of InterMoor UK that was exempted under the business profits article of the Canada-UK Treaty.

In finding that InterMoor UK was the beneficial owner of the rental payments, Ouimet J indicated that under Prévost Car, “the beneficial owner is the person who receives an amount of money for their own use and enjoyment and assumes the risk and control of the amount they received”. On this basis, InterMoor UK was the beneficial owner, given that the amounts received by it were deposited into a bank account under its exclusive control, with the ability to use the funds for its own benefit and with no immediate obligation to pay the funds over to InterMoor Norway given the different payment terms for the lease and sublease. Additionally, InterMoor UK was responsible for any damage to the chains and obtained insurance to cover this risk.

The evidence also did not establish that InterMoor UK leased the chains as agent for InterMoor Norway.

In further finding that C&W Offshore had not established a due diligence defence to the imposition of penalties on it pursuant to s. 227(8)(a), Ouimet J indicated that C&W Offshore did not take any steps with respect to the possible tax implications of its payment of the rentals; and there was no evidence of it having been misled by any person or circumstance.

Neal Armstrong. Summaries of C & W Offshore Ltd. v. The King, 2026 TCC 40 under Treaties – Income Tax Conventions – Art. 13, s. 227(8)(a) and General Concepts – Agency.