The B2B rules can operate inconsistently with the intent of Canada’s treaties
The back-to-back (B2B) rules may impose tax that is inconsistent with Canada's obligations under its bilateral tax treaties.
The reference in the B2B rules to what the withholding tax rate would be on a payment of interest or royalties to an ultimate funder may produce similar results to the derivative benefits rule in Art. XXIX –A:4 of the Canada-U.S. Treaty, but there can be significant differences. The B2B rules do not provide relief if the withholding tax rate on payments to the immediate funder is higher than that which would be applicable to payments to the ultimate funder. However, in the situation where an ultimate funder in a jurisdiction with a Treaty rate of 10% lends to a company in a non-Treaty county, who lends to the immediate funder in a country with a Treaty rate of 10%, the application of the B2B rules to this arrangement likely would result in a withholding rate of 15% - whereas:
the derivative benefit tests in the LOB rules might not provide relief in this case, since they generally require that the ultimate owner be entitled to treaty benefits that are at least as favourable (instead of providing relief to the extent of the ultimate owner's entitlement to benefits.
The B2B rules add a layer of difficulty to many licensing arrangements:
Consider a Canadian resident that licenses software-from an unrelated US resident. In order to rely on the exemption from withholding tax under the Canada-US treaty, the Canadian requests a representation from the licensor that there is no licensing arrangement that may be caught by the connection test in the back-to-back rules. Although the non-resident is a licensor of software to many customers around the world, this is likely a very unusual request, and may be viewed as requiring the disclosure of confidential information. The licensor may be unwilling to divulge this information or may seek additional fees for doing so….
Neal Armstrong. Summaries of Ian Bradley, Denny Kwan, and Dian Wang, "Is The Back-to-Back Withholding Tax Regime an Effective Anti-Treaty-shopping Measure?," Canadian Tax Journal, (2016) 64:4, 833-58 under Treaties, Art. 11, s. 212(3.2), s. 212(3.9)(b), s. 212(3.1).