Date:
20090226
Docket: A-252-08
Citation: 2009 FCA 57
CORAM: DÉCARY
J.A.
BLAIS
J.A.
SHARLOW
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
PRÉVOST CAR INC.
Respondent
REASONS FOR JUDGMENT
DÉCARY J.A.
[1]
At issue
in this appeal is the interpretation of the terms “beneficial owner”,
“bénéficiaire effectif”, in Article 10(2) of the Convention Between Canada
and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income, S.C. 1986, c.
48, Schedule 1, as amended (the “Tax Treaty”). The Tax Treaty came into force
on November 27, 1986 and was based on the Organization for Economic Cooperation
and Development (“OECD”) Model Tax Convention on Income and on Capital 1977
(“Model Convention”).
[2]
The
context in which the issue is raised is that of a payment of dividends by a
resident Canadian corporation, Prévost Car Inc. (“Prévost” or the respondent)
to its shareholder Prévost Holding B.V. (“Prévost Holding”), a corporation
resident in the Netherlands, which in turn paid dividends in substantially the
same amount to its corporate shareholders, Volvo Bussar Corporation (Volvo), a
resident of Sweden and Henlys Group plc (Henlys), a resident of the United
Kingdom.
[3]
Should
Prévost Holding be found to be the beneficial owner, the rate of withholding
tax by virtue of subsections 212(1) and 215(1) of the Income Tax Act and
in accordance with Article 10 of the Tax Treaty would be 5%. Should Volvo and
Henlys be found to be the beneficial owners, subsection 215(c) of the
Act would have required Prévost to withhold 25% (reduced to 15% in the case of
the dividend paid to Volvo because of the Canada-Sweden Tax Treaty and 10% in
the case of the dividend paid to Henlys because of the Canada-U.K. Tax Treaty).
[4]
In a
judgment cited as 2008 TCC 231, the Associate Chief Justice Rip (as he then
was) found that the beneficial owner was Prévost Holding.
[5]
The
relevant facts have been canvassed at length in the reasons for judgment of the
Tax Court of Canada. They need not be repeated here.
[6]
Counsel
for the Crown argues that the Judge has used an incorrect approach in his
interpretation of the term “beneficial owner” and in the end committed a
palpable and overriding error in finding that Prévost Holding was, in the
circumstances of this case, the beneficial owner.
Interpretation of “beneficial owner” in
Article 10(2) of the Tax Treaty
[7]
As I
understand it, the main thrust of the Crown’s argument is that the Judge gave
to the term “beneficial owner” the meaning they have in common law, thereby
ignoring the meaning they have in civil law and in international law.
[8]
It is
common ground that there is no settled definition of “beneficial ownership” (or
in French, “bénéficiaire effectif”) in the Model Convention, in the Tax Treaty
or in the Canadian Income Tax Act. In his search for the meaning of
these terms, the Judge closely examined their ordinary meaning, their technical
meaning and the meaning they might have in common law, in Québec’s civil law,
in Dutch law and in international law. He relied, inter alia, on the
OECD Commentary for Article 10(2) of the Model Convention and on OECD documents
issued subsequently to the 1977 Commentary, i.e. the OECD Conduit Companies Report
adopted by the OECD Council on November 27, 1986 and the amendments made in
2003 by the OECD to its 1977 Commentary. He also had the benefit of expert
evidence.
[9]
I pause
here to observe that counsel for both sides agree that the Judge was entitled
to rely on subsequent documents issued by the OECD in order to interpret the
Model Convention. I share their view. It is true that this Court, in CUDD
Pressure Control Inc. v. The Queen, 98 DTC 6630, at 6635, qualified the
relevance of the 1977 Commentary as being “somewhat suspect” in the search of
the intention of the drafters of a Convention signed thirty-five years earlier,
in 1942, but there was no Model Convention in 1942 and in any event McDonald
J.A., in concurring reasons, went on to recognize that OECD Commentaries “can
provide some assistance” as the 1942 Convention follows the same general
principles as the 1972 OECD Model. To the extent that it might be said that a
contrary view was expressed by the Tax Court in MIL (Investments) S.A. v. The Queen, 2006 DTC 3307 at 3320, it
does not appear that such a view was in the mind of this Court when it
dismissed the appeal from the Bench, 2007 FCA 236.
[10]
The
worldwide recognition of the provisions of the Model Convention and their
incorporation into a majority of bilateral conventions have made the
Commentaries on the provisions of the OECD Model a widely-accepted guide to the
interpretation and application of the provisions of existing bilateral conventions
(see Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802;
Klaus Vogel, “Klaus Vogel on Double Taxation Conventions” 3rd ed. (The
Hague: Kluwer Law International, 1997) at 43. In the case at bar, Article 10(2)
of the Tax Treaty is mirrored on Article 10(2) of the Model Convention.
[11]
The same
may be said with respect to later commentaries, when they represent a fair
interpretation of the words of the Model Convention and do not conflict with
Commentaries in existence at the time a specific treaty was entered and when,
of course, neither treaty partner has registered an objection to the new
Commentaries. For example, in the introduction to the Income and Capital Model
Convention and Commentary (2003), the OECD invites its members to interpret
their bilateral treaties in accordance with the Commentaries “as modified from
time to time” (par. 3) and “in the spirit of the revised Commentaries” (par.
33). The Introduction goes on, at par. 35, to note that changes to the
Commentaries are not relevant “where the provisions… are different in substance
from the amended Articles” and, at par. 36, that “many amendments are intended
to simply clarify, not change, the meaning of the Articles or the
Commentaries”.
[12]
I
therefore reach the conclusion, that for the purposes of interpreting the Tax
Treaty, the OECD Conduit Companies Report (in 1986) as well as the OECD 2003
Amendments to the 1977 Commentary are a helpful complement to the earlier
Commentaries, insofar as they are eliciting, rather than contradicting, views
previously expressed. Needless to say, the Commentaries apply to both the
English text of the Model Convention (“beneficial owner”) and to the French
text (“bénéficiaire effectif”).
[13]
In the end
the Judge determined, at par. 100 of his reasons, that “ the “beneficial owner”
of dividends is the person who receives the dividends for his or her own use
and enjoyment and assumes the risk and control of the dividend he or she
received”. To illustrate his point of view, the Judge goes on, as follows in
par. 100:
Where an
agency or mandate exists or the property is in the name of a nominee, one looks
to find on whose behalf the agent or mandatary is acting or for whom the
nominee has lent his or her name. When corporate entities are concerned, one
does not pierce the corporate veil unless the corporation is a conduit for
another person and has absolutely no discretion as to the use or application of
funds put through it as conduit, or has agreed to act on someone else's behalf
pursuant to that person's instructions without any right to do other than what
that person instructs it, for example, a stockbroker who is the registered
owner of the shares it holds for clients.
[14]
The
Judge’s formulation captures the essence of the concepts of “beneficial owner”,
“bénéficiaire effectif” as it emerges from the review of the general, technical
and legal meanings of the terms. Most importantly, perhaps, the formulation
accords with what is stated in the OECD Commentaries and in the Conduit
Companies Report.
[15]
Counsel for
the Crown has invited the Court to determine that “beneficial owner”,
“bénéficiaire effectif”, “mean the person who can, in fact, ultimately benefit
from the dividend”. That proposed definition does not appear anywhere in the
OECD documents and the very use of the word “can” opens up a myriad of
possibilities which would jeopardize the relative degree of certainty and
stability that a tax treaty seeks to achieve. The Crown, it seems to me, is
asking the Court to adopt a pejorative view of holding companies which neither
Canadian domestic law, the international community nor the Canadian government
through the process of objection, have adopted.
Who is the “beneficial owner” in the case
at bar
[16]
The Judge
found that:
a) the relationship between
Prévost Holding and its shareholders is not one of agency, or mandate nor one
where the property is in the name of a nominee (par. 100);
b) the corporate veil should not
be pierced because Prévost Holding is not “a conduit for another person”,
cannot be said to have “absolutely no discretion as to the use or application
of funds put through it as a conduit” and has not “agreed to act on someone
else’s behalf pursuant to that person’s instructions without any right to do
other than what that person instructs it, for example a stockbroker who is the
registered owner of the shares it holds for clients” (par. 100);
c) there is no evidence that
Prévost Holding was a conduit for Volvo and Henlys and there was no
predetermined or automatic flow of funds to Volvo and Henlys (par. 102);
d) Prévost Holding was a
statutory entity carrying on business operations and corporate activity in
accordance with the Dutch law under which it was constituted (par. 103);
e) Prévost Holding was not party
to the Shareholders’ Agreement (par. 103);
f)
neither
Henlys nor Volvo could take action against Prévost Holding for failure to
follow the dividend policy described in the Shareholders’ Agreement (par. 103);
g) Prévost Holding’s Deed of
Incorporation did not obligate it to pay any dividend to its shareholders (par.
104);
h) when Prévost Holding decides
to pay dividends, it must pay the dividends in accordance with the Dutch law
(par. 104);
i)
Prévost
Holding was the registered owner of Prévost shares, paid for the shares and
owned the shares for itself; when dividends are received by Prévost Holding in
respect of shares it owns, the dividends are the property of Prévost Holding
and are available to its creditors, if any, until such time as the management
board declares a dividend and the dividend is approved by the shareholders
(par. 105).
[17]
These
findings, to the extent that they are findings of fact, are supported by the
evidence. No palpable or overriding error has been shown.
[18]
To the
extent that part of these findings is based on the interpretation of the
contractual relationships between Prévost, Prévost Holding, Volvo and Henlys,
no error of law has been shown.
Disposition
[19]
I would
dismiss the appeal with costs.
“Robert
Décary”
“I
agree.
Pierre Blais J.A.”
I
agree.
K. Sharlow J.A.”
Email this Content