Husky Energy – Federal Court of Appeal finds that a securities loan between residents of two Treaty countries did not change the beneficial ownership of the transferred shares

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 agreements styled as securities lending agreements to related companies resident in Luxembourg (the “Luxcos”). On payment to the Luxcos of a special dividend on those shares, Husky withheld at the Luxembourg Treaty-reduced rate of 5%. Pursuant to the terms of the lending agreements, the Luxcos paid dividend compensation payments to the Barbcos equal to the gross amount of such special dividends to the Barbcos, and later returned the borrowed shares to the Barbcos.

In finding that the Tax Court did not err in concluding that the 5% Luxembourg Treaty-reduced rate did not apply because the Luxcos were not the beneficial owners of the special dividends, Goyette J.A. noted that they essentially had not assumed any risk with respect to the receipt of those dividends, including by entering into “perfect hedges” with respect to FX risk with related parties, or experienced any significant net monetary consequences. The Tax Court’s finding was consistent with the 2003 OECD Commentaries, which indicated that a company is not normally the beneficial owner of dividends if, though the formal owner, it only has “very narrow powers … in relation to the income concerned”.

Furthermore, the finding that the Luxcos, as the borrowers of the Husky shares, were not the beneficial owners of the dividends did not shed an adverse light on the application of treaties to true securities lending arrangements since the agreements between the Barbcos and Luxcos were not in legal substance securities lending agreements. First, the parties never intended for the Luxcos to sell or lend the borrowed Husky shares, which represented 71.5% of all the outstanding Husky shares; and, second, they had agreed that the Luxcos would not post any collateral.

The Tax Court had found that s. 212(2) imposed tax at 25% (although CRA had only assessed at 15%) 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,

Goyette JA indicated that this finding was troubling, as it would suggest that a financial institution custodian resident in one country holding for the beneficial owner resident in a second country, would not be eligible for the Treaty-reduced rate applicable to the country of residence of the beneficial owner. However, it was not necessary for her to address this issue, although she should not be taken to have endorsed the Tax Court's interpretation of s. 212(2).

Neal Armstrong. Summaries of The King v. Husky Energy Inc., 2025 FCA 176 under Treaties – Income Tax Conventions – Art. 10 and s. 212(2).