Husky Energy – Tax Court of Canada finds that a securities loan between residents of two Treaty countries eliminated access to Treaty benefits on the dividend payments

Before a Canadian public corporation (“Husky”) paid a dividend on its shares, two significant shareholders of Husky resident in Barbados (the “Barbcos”) transferred their shares under securities lending agreements to companies resident in Luxembourg with which they did not deal at arm’s length (the “Luxcos”). On payment to the Luxcos of the dividends on those shares, Husky withheld at the Luxembourg treaty-reduced rate of 5% (based on the Luxcos being the beneficial owners of the dividends and controlling at least 10% of the voting power in Husky).

Owen J found that Husky was liable under s. 215(6) for not having withheld at the non-Treaty rate of 25% (although he had no power to increase the assessment of the Minister, which had imposed tax based on the Barbados Treaty-reduced rate of 15%). S. 212(2) imposed tax at 25% on the basis of the persons to whom the dividends had in fact been paid (the Luxcos). Since the dividends had not been paid to Barbados residents (the Barbcos), the Barbados treaty rate of 15% was unavailable. Furthermore, the Luxembourg Treaty rate was unavailable because the Luxcos were not the beneficial owners of the dividends, given that they were required to make matching dividend compensation payments to the Barbcos. In this regard, Owen J stated:

Under the securities lending arrangements, [the Luxcos] enjoyed nothing more than temporary custodianship of the funds received in payment of the Dividends. The compensation payments were preordained by the terms of the borrowing requests, and this preordination ensured that at all times, the Barbcos retained their rights to the full economic value of the Dividends.

Although Husky was thus liable under s. 215(6), Owen J went on to consider the GAAR assessments of the successors to the Barbcos for the difference between the 15% withholding tax they would have borne without the securities loans, and the claimed rate of withholding at the 5% rate.

As to whether there were avoidance transactions, he rejected submissions that the transactions were carried out primarily to avoid the risk of Barbados tax on the dividends, and found that the purpose of the arrangements was primarily to reduce Part XIII tax.

The transactions were not an abuse, because they did not reduce Part XIII tax, and instead increased the rate from 15% to 25%. However, if for completeness, one assumed that the conditions for the 5% rate under the Barbados Treaty had been satisfied, then under this hypothesis there would appear to be no abuse. After referring to the similar analysis in Alta Energy, he stated:

Given the absence of any rule in Article 10 or elsewhere in the Luxembourg Treaty to supplement the residence requirement, the beneficial owner requirement, and the voting requirement, it is reasonable to conclude that Canada and Luxembourg were satisfied with the protection against “conduits” and flow-through arrangements afforded by the inclusion in Article 10(2) of those requirements. In other words, the true intentions of Canada and Luxembourg are fully reflected in the scope of the concepts of residence, beneficial owner and voting power adopted in Article 10(2).

Neal Armstrong. Summaries of Husky Energy Inc. v. The King, 2023 TCC 167 under s. 212(2), Treaties – Income Tax Conventions – Art. 10, s. 245(1) – tax benefit, s. 245(4).