Treaty Shopping Proposals – A Review of 2013 and 2014 Developments

In Budget 2013, the Government announced its intention to consult on possible measures to combat treaty shopping. Eleven months later, in Budget 2014, the Government invited comments on a proposed domestic anti-treaty abuse rule. This article briefly reviews developments arising between the two budgets and provides high level comments in respect of the 2014 proposal. For additional and more detailed comments on Budget 2014, see Economic Action Plan 2014 – International Tax Planning Under Continued Assault.1


McCarthy Tétrault

Budget 2013, OECD Action Plan and Canadian Domestic Consultation

As noted above, in Budget 2013, the Government announced its intention to consult on possible measures to combat treaty shopping.

Four months later, in July 2013, the Organization for Economic Co-operation and Development (OECD) published its Action Plan on Base Erosion and Profit Shifting (Action Plan).2 The Action Plan described 15 items to address base erosion and profit shifting (BEPS) in a co-ordinated and comprehensive manner. Commenting that treaty abuse was "one of the most important sources of BEPS concerns", the OECD included the following as Action 6 and set a September 2014 deadline for this item:

Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.

On August 12, 2013, the Government published its consultation paper entitled "Consultation Paper on Treaty Shopping – The Problem and Possible Solutions".3 The paper set out the perceived problem, Canada’s position and recent judicial experiences, as well as possible solutions and a series of questions for stakeholders. Specifically, the Government invited stakeholders to comment on:

  • the advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both;
  • the relative merits of the various approaches to treaty shopping identified by the OECD as well as whether there are other approaches and types of rules that should be considered by Canada in evaluating how best to address the problem of treaty shopping;
  • whether a general approach is preferred over a relatively more specific and objective approach;
  • whether a main purpose test, if enacted in domestic tax laws, would be effective in preventing treaty shopping and would achieve an acceptable level of certainty for taxpayers;
  • which of the approaches (a main purpose approach or a more specific approach) would strike the best overall balance between effectiveness, certainty and simplicity and ease of administration;
  • the design of conditions and exceptions (e.g., the substantive business operations and derivative benefits exceptions) under a more specific approach as well as any other exceptions that should be considered with a view to ensuring the measure is effective and applies in a reasonably straightforward manner with predictable outcomes; and
  • whether a domestic anti-treaty shopping rule should apply if a tax treaty contains a comprehensive anti-treaty shopping rule.

The period for comment was open until December 13, 2013 and various taxpayers, including the Tax Executives Institute, Inc. (TEI) and the Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada (Joint Committee), submitted comments.4 A review of the comments reveals a number of recurring sentiments, including:

  • a view that it was premature for the Government to be taking legislative action and that no such action should be taken until the outcome of the OECD’s BEPS project is known;
  • a strong preference for a treaty-based approach over a domestic law approach;
  • a strong preference for specific anti-avoidance rules (coupled with relieving provisions and safe harbours) over a general anti-avoidance rule; and
  • a view that the existing general anti-avoidance rule (GAAR) in section 245 of the Income Tax Act (Canada) (Tax Act) remained a powerful and perhaps underutilized tool in combatting perceived treaty abuse.

Budget 2014

Notwithstanding the comments received in response to the August 2013 consultation and the initiatives already underway by the OECD, the Government announced in Budget 2014 that it had determined to implement a general domestic anti-treaty shopping rule. To this end, the Government: (i) set out guidance on the domestic anti-treaty shopping rule that it intends to adopt, (ii) provided five examples in relation to the intended application of the new rule, including three examples in which recent treaty shopping cases decided in favour of the taxpayer (i.e., Velcro Canada Inc.,5 Prevost Car Inc.6 and MIL (Investments) SA7) are, in effect, overruled, and (iii) invited comments on the proposed rule.

As set out in Budget 2014, the new anti-abuse rule is expected to include the following principal elements:

  • Main Purpose (Charging) Provision: The main purpose provision, which will be subject to a relieving provision, will deny treaty benefits in respect of an item of income, profit or gain (relevant treaty income) where it is reasonable to conclude that one of the main reasons for undertaking a transaction (or a transaction that is part of a series of transactions or events) was to obtain the benefit.
  • Conduit Presumption: The legislation will establish a rebuttable presumption that one of the main purposes for undertaking a transaction, or a transaction in a series, was to obtain a treaty benefit if the relevant treaty income was "primarily used" to pay, distribute or otherwise transfer an amount to a person who would not have been entitled to equivalent or more favourable treaty benefits if the person had received the income directly.
  • Safe Harbour Presumption: Subject to the conduit presumption, there will be a rebuttable presumption that none of the main purposes for undertaking a transaction in which a person resident in a particular treaty country receives relevant treaty income was to obtain a treaty benefit if (i) the person or a related person carries on an active business (other than managing investments) in the particular treaty country and, where the relevant treaty income is derived from a related person in Canada, that business is substantial in relation to activity carried on in Canada giving rise to the relevant treaty income; (ii) the person is not controlled, directly or indirectly in any manner whatever (i.e., either de jure control or de facto control contemplated by subsection 256(5.1) of the Tax Act) by another person or persons, who would not have been entitled to an equivalent (or more favourable) treaty benefit if the other person or persons received the relevant treaty income directly; or (iii) the person is a corporation or trust the shares or units of which are regularly traded on a recognized stock exchange.
  • Relieving Provision: Where the main purpose provision applies to a particular treaty benefit, the treaty benefit will nonetheless be permitted to the extent reasonable in the circumstances.

Budget 2014 provides that the new rule could be included in the Income Tax Conventions Interpretations Act and would apply to taxation years that commence after the enactment of the rule into Canadian law.

On April 10, 2014, TEI submitted comments in response to the Government’s proposal.8 In the submission, TEI reiterated its concerns expressed in its prior submission and its strong recommendation that Canada "adopt the approach of negotiating objective Limitation on Benefits (LOB) clauses in particular treaties rather than enacting a general and amorphous anti-treaty-abuse provision in its domestic legislation". TEI also provided specific comments in respect of the four principal elements of the budget proposal. Of particular note are concerns in respect of: (i) the Government’s choice of "one of the main purposes" language, (ii) the breadth of the conduit presumption, (iii) limitations in the safe harbour provisions, (iv) ambiguity in respect of the application of the relieving provision owing to the phrase "reasonable having regard to all the circumstances" and the absence of an administrative review process, and (v) potential for "unprincipled treaty override" in circumstances where the relevant treaty is already subject to an LOB provision, such as the Canada-US treaty.

As at the time of writing, the Joint Committee is also in the process of preparing a submission.

BEPS Action 6

On March 14, 2014, the OECD issued a public discussion draft on Action 6 and requested comments no later than April 9, 2014. Copies of the discussion draft and comments received (including from TEI) are available on the OECD’s website.9 Many of the concerns identified are similar to concerns identified in respect of the Canadian domestic proposal.

1 Available at
2 Available at:
3 Available at:
4 Copies of the comments are available at:
5 2012 DTC 1100 (TCC).
6 2009 DTC 5053 (FCA).
7 2006 DTC 3307 (TCC).
8 Available at
9 Available at