Income Tax Conventions

At issue in a motion brought under Rule 58(1) was whether Art. XXII(2) of the Canada-Brazil Treaty contemplated that a Canadian foreign tax credit should be allowed only on the basis of the Canadian taxes otherwise applicable to the Brazilian source income in question as reduced by applicable Canadian expenses. Art. XXII(2) provided:

The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.

After noting (at para. 65) that “Crown Forest found that accepted model conventions and official commentaries thereon may be referred to without the need to find an ambiguity in the text of the tax treaty” and (at para. 67) that “although Brazil is not an OECD member, the similarities between the language used in Article XXII(2) of the Treaty and that found in paragraph 23B of the 1977 OECD Model is evidence that the 1977 OECD Model was considered in drafting the Treaty,” Paris J stated (at para. 72):

At paragraph 63 of the Commentaries [on the 1977 OECD Model], the limitation on the deduction [in Art. 23B] is stated to be “normally computed as the tax on net income, i.e. on the income from [the State of source] less allowable deductions.”

In March 1993 an individual ("Boulle") transferred his shares of a Canadian public junior exploration company ("DFR") to the taxpayer, which was a newly-incorporated Cayman Islands company wholly owned by him. By June 1995 the DFR shares had substantially appreciated in value, at which time the taxpayer exchanged, on a rollover basis pursuant to s. 85.1, a portion of its DFR shares for common shares of a large Canadian public company ("Inco"), with the result that the taxpayer's shareholding in DFR was reduced below 10%.

Bell J. found that in light of OECD commentary (not including OECD commentary that was made subsequent to the negotiation of the Treaty) and "the decision by Canada and Luxembourg not to include an explicit reference to anti-avoidance rules in their carefully negotiated Treaty", that there was no ambiguity in the Treaty permitting it to be construed as containing an inherent anti-abuse rule.

In the course of considering whether the China-Canada Income Tax Convention applied to Hong Kong income taxes after Hong Kong became part of the People's Republic of China, Rip T.C.J. referred with approval (at p. 1872) to the view of a commentator that:

"If the tax system remains substantially in place with regard to the successor states, it seems reasonable that the treaty should continue to be applied. If however, the state succession is followed by a major change of substance in the tax systems then it seems reasonable that the Treaty does not continue."

Décary, J.A. stated (at para. 11) that it was appropriate to refer to OECD commentaries issued subsequent to the date of a Treaty (at para. 11):

"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."

In finding that a deemed dividend arising under s. 84 did not result from an "alienation" for purposes of Article XIII of the Canada-U.S. Income Tax Convention, Bowman TCJ. stated that he could "see no reason why a treaty provision should not be subject to the same principles of interpretation as domestic statutes insofar as they require that the provisions be construed in accordance with the object and spirit and the telos at which they are aimed and not in a manner that permits the perpetration of an abuse of the treaty".

Mogan T.C.J. stated that:

"When there is any inconsistency between the provisions of the [Canada-U.S.] Convention and the provisions of the Income Tax Act, the provisions of the Convention prevail to the extent of the inconsistency."

In finding that the taxpayer (who was a resident of Ireland in receipt of both Canadian old age security payments and also pension income that would be exempt under the Canada-Ireland Treaty in the absence of the making of an election under s. 217) was not entitled to receive both the credit under s. 217(6) in respect of the pension income and also to treat the pension income by virtue of the Treaty as being exempt from Canadian income tax, Ripp T.C.J. applied (at p. 1854) the principle that:

"Taxpayers should not be allowed to take inconsistent positions with respect to the application of tax treaties and domestic tax laws in order to duplicate a benefit."

Before rejecting the taxpayer's submission that Article 25A of the Convention between South Africa and the U.K., which if it permitted the South African Revenue Service to collect tax debts arising prior to the coming into force of the Convention through the respondent (HMRC) of South African taxes, would thereby entail retrospective application of the Convention, Lloyd Jones LJ referred to Article 28 of the Vienna Convention ("Unless a different intention appears...the [treaty's]provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the date of the entry-into-force of the treaty..."), and stated (at para. 43):

Although the Vienna Convention is not in force between the United Kingdom and South Africa, the basic rule on non-retroactivity reflected in Article 28 may be taken to be declaratory of existing rules of customary international law binding on all States (Ambatielos case (Preliminary Objections) ICJ Rep. (1952) 40; Sinclair, The Vienna Convention on the Law of Treaties, 2nd Ed. (1984) p. 85). However, the principle of non-retroactivity is not a peremptory norm of international law and, as Article 28 makes clear, it is open to the parties to agree to the contrary.

The Canadian-resident taxpayer transferred shares to an Austrian private foundation, which held the shares under an arrangement which was found by C. Miller J to be a trust. At issue was whether s. 75(2) attributed the private foundation's taxable capital gain from its subsequent disposition of the shares to the taxpayer. The Minister argued that Art. 13(5) of the Austrian treaty (providing that the alienation of property (other than excepted property) by a resident of Austria was taxable only in Austria) did not apply, because s. 75(2) treated the foundation's proceeds of alienation as the taxpayer's proceeds.

Miller J., having already found on other grounds that s. 75(2) did not apply, rejected the Minister's argument. Article 13(5) was unambiguous in shielding the taxpayer from Canadian tax liability from the alienation of the shares. S. 75(2) did not deem the taxpayer rather than the foundation to be the alienator. Moreover, other articles in the Canada-Austria Convention and in other tax treaties contained specific exceptions where domestic tax laws would prevail over treaty provisions, and no such provision applied here.

HMRC increased the UK branch profits of the Irish taxpayers’ branch banking, or home mortgages, businesses by attributing to their UK permanent establishments notional additional free capital on the basis that if they had operated as distinct and separate enterprises, they would have had a higher amount of free capital and therefore a correspondingly lower amount of borrowed capital – with the result that HMRC disallowed interest which was actually paid to third parties. Patten LJ was fortified in his conclusion that these adjustments accorded with the “comparator provisions” of the permanent establishment Article in the UK-Ireland Treaty (Art. 8(2), which was similar to Art. 7(2) of the OECD Model) by passages in the 2008 OECD Commentaries, notwithstanding that he was dealing with a 1976 Treaty. He stated (at para. 31):

Although [43]-[47] of the 2008 Commentary are new, it is clear from [7] of the Commentary that they were considered appropriate for inclusion by the OECD because they were not in conflict with earlier versions of the Commentary. … On that basis, the 2008 Commentary, although new, would be admissible as an aid to the construction of Article 8(2) of the 1976 Convention which, as I have explained, adopted the wording of Article 7(2). It would only be inadmissible if the new material made substantive changes which are inconsistent with the commentaries in existence at the time of the 1976 Convention.

The Indian taxpayer (Satyam) argued unsuccessfully before the Full Federal Court of Australia “that tax treaties are, and can only be, exclusively relieving: that is, they are only ever ‘shields not swords’ and not the grant of a standalone taxing power and independent imposition of taxation.”

Art. 23(1) of the Australia-India Treaty provided:

Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.

The bolded language had the effect of indicating that a technical-services royalty, which Australia was permitted to tax under the Australian royalties article of the Treaty, was deemed to arise in Australia not only for the purposes of the Article of the Treaty dealing with the elimination of double taxation, but also for the purposes of the Australian domestic taxation provisions. Consequently, technical services fees (which were deemed royalties) earned by Satyam, which in the absence of the Treaty would have been considered to not arise in Australia so that they would not have been subject to Australian income tax under the approximate Australian equivalent of ITA s. 115, were now deemed for the purposes of that provision to arise in Australia and to therefore be subject to Australian income tax.