Sun Life Assurance Co. of Canada v. Pearson,  BTC 223 (HC), aff'd  BTC 282 (C.A.)
The fact that a British branch of a Canadian life insurance company faced a higher level of taxation than the branch would have faced had it been an enterprise resident in the U.K. did not constitute discrimination. Article 22 of the 1967 and 1980 Canada-U.K. Conventions are "designed to preclude and nullify specific provisions which discriminate against a branch", and the U.K. branch - tax provisions were not objectionable in that sense.
Addy v Commissioner of Taxation,  FCA 1768
The taxpayer, who was a British citizen aged 23 and had been residing at her family home in Bexleyheath, Kent, came to Australia on a “working visa” on 20 August 2015, and returned on 1 May 2017. She was found by Logan J to be resident in Australia during this period.
A citizen and resident of Australia would have largely escaped income taxation on her modest income as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.
“Nationals” of the UK were defined in Art. 3(1) of the Australia-U.K. Treaty to Include British citizens and companies deriving their status from domestic law, and similarly for Australian nationals, so that the taxpayer was the former and not the latter. Logan J found that the imposition of the 15% tax on the taxpayer’s earnings in Australia as a waiter contravened Art. 25(1) of the Treaty, which provided:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
Logan J observed (at para. 89):
There is just no doubt that an Australian national cannot hold a working holiday visa issued under the Migration Act … . Under that Act, visas may only be issued to non-citizens … .
In finding for the taxpayer, he stated (at paras. 103-104):
[T]he discrimination between resident derived income from the same source in Australia is based on nationality. It is disguised by the reference to “working holiday maker” but the definition of that term makes it plain that what the disguise covers is nationality. A resident “national” of Australia undertaking the same work as did Ms Addy … would have the benefit of the tax free threshold.
… Materially, so far as the applicable rate of tax is concerned, the Rates Act distinguishes between individuals on the basis of the type of visa which that individual holds. Only non-citizens can hold the types of visa that constitute a “working holiday visa” (as defined), of which those successively held by Ms Addy were one type. That is a disguised form of discrimination based on nationality. That is exactly the type of discrimination which is prohibited by Art 25(1) … . It is but a more particular variant of the disguised discrimination example given in the OECD commentaries, at 332, , of different treatment of individuals based on whether or not they hold, or are entitled to, a passport issued by the State.
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|Tax Topics - Income Tax Act - Section 2 - Subsection 2(1)||20-month non-“itinerant” stay under working visa based at a Sydney Australia home was residence||195|
Kenny v. The Queen, 2018 TCC 2 (Informal Procedure)
In 2014, an Irish resident earned $32,728.52 in employment income from working for a few weeks in Fort McMurray, and also received $23,002.37 from the Irish government, mostly as means-tested assistance. C Miller J found that these assistance payments qualified under s. 56(1)(u) as income from social assistance. Accordingly, the taxpayer could not claim full Canadian credits of $28,717, as he did not satisfy the condition in s. 118.94 that “substantially all” of his income for the year was included in computing his taxable income earned in Canada for the year.
Counsel submitted that this result violated Art. 24(1) of the Canada-Ireland Treaty, which provided:
1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.
In rejecting this submission, C Miller J stated (at para. 8):
I read this provision as applying to nationals, not residents, to ensure that a Canadian citizen residing in Ireland and receiving the same payments (employment from Canada and social assistance from Ireland) as Mr. Kenny would not be treated any differently. I do not find subsection 24(1) of the Treaty assists Mr. Kenny in this regard.
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|Tax Topics - Income Tax Act - Section 118.94||foreign government assistance scuppered the “substantially all” test in s. 118.94||284|
CIT v. Herbalife International India Pvt. Ltd, ITA 7/2007, 13 May 2016 (Delhi High Court)
The taxpayer, which was an Indian subsidiary of a U.S. corporation (“HII”), paid fees for administrative services to a U.S. affiliate (“HIAI”), which were found in the ITAT not to be subject to Indian income tax as HIAI did not have a permanent establishment in India. The Indian income tax authority (“AO”) denied the deduction by the taxpayer of the fees in the computation of its income by applying s. 40(1)(a)(i) of the Income Tax Act, 1961 (India), which denied a deduction where there was a failure to withhold tax (tax deducted at source or “TDS”) on payments of fees for technical services made to a non-resident.
Article 26(3) of the U.S.-India Double Taxation Avoidance Agreement provided:
Except where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest), or paragraph 8 of Article 12 (Royalties and Fees for included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.
After first noting the AO’s argument (at para. 25) that s. 40(a)(i) “did not create any classification between resident payments and non-resident payment” and merely “deals with disallowance of expenditures where TDS has not be deducted” and that the TDS, and its enforcement through the denial of a deduction, was a reasonable measure for dealing with difficulties of collection from non-residents, and before concluding that the disallowance of the deduction of the fees was prohibited by Art. 26(3), Muralidhar J stated (at paras. 40, 56):
In the context of which the expression “other disbursement” occurs in Article 26 (3), it connotes something other than “interest and royalties”. If the intention was that “other disbursements” should also be in the nature of interest and royalties then the word 'other' should have been followed by “such” or “such like”. …
…[T]he condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the time of payment. On the other hand, payments to residents were neither subject to the condition of deduction of TDS nor, naturally, to the further consequence of disallowance of the payment as deduction. The expression “under the same conditions” in Article 26 (3) of the DTAA clarifies the nature of the receipt and conditions of its deductibility. It is relatable not merely to the compliance requirement of deduction of TDS. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination.
One of the challenges brought by the appellant to the Canadian FATCA legislation (i.e., the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (enacting the "IGA") and ss. 263 to 269 of the Income Tax Act) was that "the collection and disclosure of the taxpayer information contemplated by the IGA subjects US nationals resident in Canada to taxation and requirements connected therewith that are more burdensome than the taxation and requirements connected therewith to which Canadian citizens resident in Canada are subjected" contrary to Art. XXV of the Canada-U.S. Income Tax Convention (para. 62). In rejecting this argument (as well as rejecting other Treaty-based arguments), Martineau J stated (at para. 73):
[T]he burden of disclosing banking information is imposed by Part XVIII on financial institutions…and to the extent that the IGA and Part XVIII of the ITA impose burdensome requirements connected to taxation of US nationals resident in Canada, such burden is equally imposed on Canadian nationals in similar circumstances.
See summary under Treaties – Art. 27.
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|Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc.||regard to object rather than political statements||49|
|Tax Topics - Treaties - Income Tax Conventions - Article 26A||Art. 26 of US Convention did not prohibit FATCA information exchanges||158|
|Tax Topics - Treaties - Income Tax Conventions - Article 27||FATCA information exchanged automatically irrespective of any substantive U.S. tax liability was "relevant" to U.S. tax administration||361|
Saipem UK Limited v. The Queen, 2011 DTC 1053 [at 297], 2011 TCC 25, aff'd 2011 DTC 5148 [at 6159], 2011 FCA 243
The taxpayer was a non-resident UK corporation operating in Canada through a permanent establishment. It claimed capital losses of a related non-resident corporation that was wound up into the taxpayer under s. 88(1.1). The Minister disallowed the deductions on the basis that s. 88(1.1) is only available to Canadian corporations, and the taxpayer was not a "Canadian corporation" under s. 89(1). The taxpayer argued that the definition of "Canadian corporation" discriminated on the basis of nationality, contrary to Article 22 of the Canada-UK tax treaty.
Angers J. found that the definition was not discriminatory in the circumstances, because it excluded non-resident corporations of any nationality. He remarked at para. 44 that "discrimination on the basis of residence does not amount to discrimination on the basis of nationality" for tax treaty purposes. Moreover, he held at paras. 49-50 that the definition was not discriminatory on its face because, under paragraph (b) of the definition, corporations incorporated outside of Canada could qualify as Canadian corporations if they had been resident in Canada since June 18, 1971.
Ramada Ontario Ltd. v. The Queen, 94 DTC 1071 (TCC)
The 1983 amendments to s. 18(4) of the Act were merely intended to tighten the original provisions, and not to fundamentally alter or change the general nature thereof for purposes of Article XXV.8 of the Canada-U.S. Convention.
A U.S.-resident limited liability company (“Parentco LLC”), which does not carry on business in Canada, wholly owns U.S.-resident LLCs (the “Subco LLCs”), each of which carries on business in Canada through a permanent establishment. Can the non-capital losses of the Subco LLCs be utilized by Parentco LLC following the wind-up of the Subco LLCs given that the requirement in s. 88(1.1), that both Parentco LLC and Subco LLC be Canadian corporations, is discrimination based on nationality or on a permanent establishment status contrary to Art. XXV of the Canada – U.S. Treaty? Would the response be different if the Subco LLCs instead amalgamated with Parentco LLC?
Respecting Art. XXV(1), CRA stated:
Saipem UK concludes that the kind of discrimination contemplated in the analogous paragraph 1 of Article 22 of the Canada - U.K. Treaty has to be based only on the place of incorporation, while different treatment based on residence does not offend that provision because nationals of one state that are non-residents of the other state are not “in the same circumstances” as resident nationals of that other state.
As for Art. XXV(5), CRA noted the statement into para. 41 of the OECD Commentary on Art. 24(3) of the OECD Model Convention that “It does not extend to rules that take account of the relationship between an enterprise and other enterprises (e.g….transfer of losses…,” and stated:
[A] rule that effectively allows for the transfer of losses between companies under common ownership does not in our view come within the protection against discrimination found in paragraph 5 of Article XXV.. .
CRA also noted:
A Canadian corporation that winds up a subsidiary that is not a Canadian corporation is not entitled to use losses of the subsidiary. On this basis, by not being able to deduct losses incurred by Subco LLCs Parentco LLC is not being treated less favorably than a Canadian enterprise carrying on the same activities. As a result, the Canadian corporation requirement in subsection 88(1.1) does not in our view amount to discrimination against a permanent establishment contrary to paragraph 5 of Article XXV… .
The taxable Canadian corporation requirement in s. 87(1) also was not contrary to Art. XXV.
24 October 1991 T.I. (Tax Window, No. 11, p. 7, ¶1531)
Paragraph 9 of Article XXV of the Canada-U.S. Income Tax Convention does not override the territorial scope limitation in s. 20(1). Accordingly, self-employed members of a national business organization cannot deduct the cost of a cruise from a Canadian port to a U.S. port even if the ship stays entirely within the territorial waters of Canada and the U.S.
Hugh J. Ault, "Some Reflections on the OECD and the Sources of International Tax Principles", Tax Notes International, 17 June, 2013, p. 1195
After referring to the 1998 release by the OECD of a report on harmful tax competition that signaled an important change of focus in international cooperation efforts and to the OECD's base erosion and profit shifting (BEPS) project, he considered the following case.
R Co., resident in state R, transfers intangibles that it has developed, often in the use of subsidies for research and development in state R, to an intermediary company, I Co., based in a tax haven. I Co. then licenses the intangibles to related company S, which uses the intangibles to earn profits in state S, and deducts the payments to I Co. Thus, the profits are shifted from R. Co. to I Co. through the manipulation of the transfer pricing rules, and the tax base of state S is eroded by the deductible payments to I Co., resulting in income that is not taxed anywhere, which some have begun to refer to as "stateless" income. What to do? A number of the techniques described above could be applied to this situation. State R could prevent the shifting by applying its CFC rules to I Co. and tax directly the income of I Co. to R Co. Or state R could ignore the transaction under its domestic GAAR and also tax the income directly to R. Co. and not I Co. Or state S could deny a deduction for the license payments under tis domestic rules which might limit the deductibility of payments to low-tax jurisdictions.
Now suppose state R is the U.S., I Co. is located in Ireland or the Netherlands, and state S is Germany. Treaty rules may restrict the ability of state S to deny deductions under non-discrimination principles in article 24. Under at least some interpretations of the treaty, there may also be a limit on the ability of state R in some circumstances to apply its CFC rules, and if state R and the state in which I Co. is located are EU countries, the European Court of Justice decisions limiting CFC application to wholly artificial transactions may also limit CFC application. Similarly, some courts do not adopt the OECD position that domestic anti-avoidance rules like GAAR apply to treaty situations and these courts would not allow the tax authorities to ignore the existence of I Co. as long as it technically meets the definition of a treaty resident. So there is much work to be done in evaluating the extent to which treaty rules need to be modified to deal effectively with the problems identified in the BEPS project.
John Avery Jones et al., "Article 24(5) of the OECD Model in Relation to Intra-group Transfers of Assets and Profits and Losses,"  British Tax Review, No. 5, p. 535; World Tax Review, Vol. 3, No. 2, June 2011 (dual publication).