Words and Phrases - "arrangement or transaction"

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Michael N. Kandev, John J. Lennard, "Interpreting the Expression 'Arrangement or Transaction' in the Principal Purpose Test of the MLI", International Tax (Wolters Kluwer CCH), June 2019, No. 106, p. 1

No Canadian domestic definition of the phrase “arrangement or transaction” (p.3)

While Canada’s ITA uses the words “arrangement” and “transaction” individually, it does not combine them in the expression “arrangement or transaction” and it does not provide any exhaustive definitions for them other than to clarify for certain specific purposes that a transaction includes an arrangement or event. [fn 11: See ITA subsections 233.1(1), 237.3(1), 245(1), 247(1).] Hence, the ITA does not provide a meaning of these words that could be expected to conflict with their ordinary meaning.

Ordinary meaning of “arrangement or transaction” (p. 3)

Accordingly, in interpreting the term “arrangement or transaction” in the MLI, a proper analysis should seek to determine the ordinary meaning of the expression and its component words in light of their context and the purpose of the PPT and the MLI in general. …

[T]he ordinary meaning of “arrangement or transaction” would seem to refer to:

(i) a single act or instance of conducting business, or any activity involving two or more persons, or multiple acts, instances, or activities that are part of a pre-ordained series (i.e., a “transaction”); or

(ii) a disposition of measures planned, drawn up, or ordered to accomplish a particular purpose (i.e., an “arrangement”).

OECD Commentary (p. 4)

Regarding the intended scope of the expression “arrangement or transaction”, the OECD commentary [para. 177 of Commentary on Art. 29(9)] reads as follows:

The terms “arrangement or transaction” should be interpreted broadly and include any agreement, understanding, scheme, transaction or series of transactions whether or not they are legally enforceable….

An example of an “arrangement” would be where steps are taken to ensure that meetings of the board of directors of a company are held in a different country in order to claim that the company has changed its residence. One transaction alone may result in a benefit, or it may operate in conjunction with a more elaborate series of transactions that together result in the benefit.

The above OECD commentary seems to support the following points:

(i) an “arrangement” seems to contemplate measures or steps that, while not legally enforceable and not “transactions” in a strict sense, are planned, drawn up, or ordered to lead to a particular result; and

(ii) although the expression of “series of transactions” is not expressly used in the PPT, the overall meaning of “arrangement or transaction” should be read to include a series.

Implicit series of transactions concept unlikely to be informed by broad Canadian domestic concept (p. 5)

[T]he SCC [in Copthorne] confirmed its prior holding in Canada Trustco that it is sufficient for a later transaction to have been completed “because of” or “in relation to” an earlier transaction in order to be considered part of the same series, regardless of whether the later transaction was ever even contemplated at the time of the earlier transaction. …

[I]n light of the MLI’s stated harmonization purpose, it would be unreasonable, in our view, to read into the meaning of an “arrangement or transaction” for the PPT the extended domestic meaning of a series of transactions that will likely be inconsistent with the meaning of that expression in other MLI participating jurisdictions. Doing so would mean that the MLI would be applied inconsistently across jurisdictions, which would defeat the very purpose of the MLI.

Examples of application (p. 5)

[B]ack-to-back royalty payments made pursuant to contracts established in an alleged treaty shopping scenario, such as the ones in Velcro, would normally be seen to be part of a series that is within the scope of the PPT. Conversely, if the holding structure for a Canadian oil and gas company, such as in the recent Alta Energy case, is migrated to Luxembourg at a time when there is neither an agreement nor a specific genuine intention to sell the shares of the Canadian company, no series should exist for the purposes of the application of the PPT. In such context, when it comes to the determination of the impugned series of arrangements or transactions, the scope of application of the GAAR may very well be broader than that of the PPT.

Conclusion (p. 6)

[W]hile the expression “arrangement or transaction” as used in the PPT is broad enough to include a series of transactions, for this purpose a “series” must be given its ordinary and natural meaning (i.e., pre-ordained or pre-ordered transactions that can be construed as a single composite transaction)…[and] the extended meaning of series under the ITA, as set out by the SCC …should not be relevant … .