The combined efforts of the G20 and the OECD on base erosion and profits shifting or “BEPS” has attracted considerable attention in the international business and tax community, and rightly so.  In July 2013 the OECD released its “BEPS Action Plan”, which followed the “Declaration on BEPS” adopted at the May 2013 Ministerial Council Meeting in Paris.  The BEPS Action Plan is an ambitious, 15 part multi-lateral plan to address a number of concerns that the G20 and OECD have expressed relating to international corporate tax planning.  This plan was triggered in part by headline grabbing articles in the international press focusing on what were argued as being the inappropriately low global effective tax rates of a number of high profile multi-national enterprises. 

It is important to note that the G20 and OECD concerns are not rooted in the reported low effective tax rates per se, but in broader public policy issues of which these tax rates are only evidence.  These public policy issues include fiscal integrity, horizontal and vertical tax equity (particularly as between multi-national enterprises and small and medium sized enterprises), and the erosion of national tax bases.

BEPS and Treaty Shopping

The BEPS Action Plan includes 15 actions points, one of which is “Action 6 – Prevent Treaty Abuse”.  The BEPS Action Plan states that “Treaty abuse is one of the most important sources of BEPS concerns”, and then describes Action 6 as follows:

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.

On March 14, 2014 the OECD released its public discussion draft relating to Action 6.  In that discussion draft the OECD recommended an approach to treaty shopping that is based on changes to the OECD model tax treaty and to individual bi-lateral tax treaties.  In particular, the discussion draft recommended the following  “three-pronged approach”:

  • First, it is recommended to include in the title and preamble of tax treaties a clear statement that the Contracting States, when entering into a treaty, wish to prevent tax avoidance and, in particular, intend to avoid creating opportunities for treaty shopping;
  • Second, it is recommended to include in tax treaties a specific anti-abuse rule based on the limitation-on-benefits provisions included in treaties concluded by the United States and a few other countries.
  • Third, in order to address other forms of treaty abuse, including treaty shopping situations that would not be covered by the specific anti-abuse rule described in the preceding paragraph (such as certain conduit financing arrangements), it is recommended to add to tax treaties a more general anti-abuse rule.

The discussion draft expands on these recommendations and contains far more detail.  The appropriateness of these recommendations can be debated, as they currently are.  It is notable that the recommendations are all treaty-based – in other words, none suggests that individual countries should adopt unilateral, domestic law-based approaches to treaty shopping.  It seems obvious that a coordinated, multi-lateral, treaty based approach to addressing perceived treaty shopping issues would be preferable to having individual countries adopt their own approaches.  Nevertheless, Canada seems to be prepared to “go it alone” (or, some might argue, “lead the way”).

Canada and Treaty Shopping

Through-out the time that the BEPS Action Plan has been developing, and notwithstanding the fact that Canada is known to be actively involved in the international discussions and efforts behind the BEPS Action Plan, Canada has been taking its own steps and its own approaches to treaty shopping.  In particular, the Canadian Minister of Finance (at the time the late Jim Flaherty) announced in his budget of March 2013 “the Government’s intention to consult on possible measures that would protect the integrity of Canada’s tax treaties while preserving a business tax environment that is conducive to foreign investment”.  These are laudable objectives and hard to dispute.  Nevertheless, as noted above, their appropriateness at this time can be debated.

Following this announcement the Department of Finance released a consultation paper in August of 2013 with the consultation period open to December 13, 2013.  The federal budget of February 2014 (“Budget 2014”) included a formal proposal for a domestic Canadian anti-treaty shopping rule.  The main elements of the proposed rule were described in Budget 2014 as follows:

  • Main purpose provision: subject to the relieving provision, a benefit would not be provided under a tax treaty to a person in respect of an amount of income, profit or gain (relevant treaty income) if it is reasonable to conclude that one of the main purposes for undertaking a transaction, or a transaction that is part of a series of transactions or events that results in the benefit, was for the person to obtain the benefit.
  • Conduit presumption: it would be presumed, in the absence of proof to the contrary, that one of the main purposes for undertaking a transaction that results in a benefit under a tax treaty (or that is part of a series of transactions or events that results in the benefit) was for a person to obtain the benefit if the relevant treaty income is primarily used to pay, distribute or otherwise transfer, directly or indirectly, at any time or in any form, an amount to another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly.
  • Safe harbour presumption: subject to the conduit presumption, it would be presumed, in the absence of proof to the contrary, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if:
    • the person (or a related person) carries on an active business (other than managing investments) in the state with which Canada has concluded the tax treaty and, where the relevant treaty income is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada giving rise to the relevant treaty income;
    • the person is not controlled, directly or indirectly in any manner whatever, by another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly; or
    • the person is a corporation or a trust the shares or units of which are regularly traded on a recognized stock exchange.
  • Relieving provision: If the main purpose provision applies in respect of a benefit under a tax treaty, the benefit is to be provided, in whole or in part, to the extent that it is reasonable having regard to all the circumstances.

The budget materials then took the somewhat unusual approach of providing five examples describing circumstances in which the Department of Finance thought that the proposed rule would or would not have application.  The first three examples related directly to cases that the Canada Revenue Agency (“CRA”) has lost in the past several years involving what the CRA considered to be inappropriate treaty shopping, being the Velcro Canada1, Prevost Car2 and MIL3 cases.  It is debatable whether the concerns of the CRA and, presumably, the Department of Finance are well founded, at least in respect of the first two cases.  Nevertheless, because that the CRA and Finance have these concerns, and that they seem to be among the motivations for the proposals (it seems clear that the losses in the three mentioned cases are what motivated the Minister of Finance to propose the new rule), it is important in trying to understand where these proposals may go.

Current Status

Budget 2014 provided for a 60 day consultation period on the proposed rule.  The Budget also stated that “the rule, if adopted, could be included in the Income Tax Conventions Interpretation Act so that it would apply in respect of all of Canada’s tax treaties.”  The Department of Finance is known to be actively soliciting comments from stakeholders.  All of this suggests that Finance is aiming to include the rule in the second budget implementation bill this coming fall (the usual practice of Finance is to have legislation emanating from a budget passed as part of one of two budget implementation bills, the first of which typically is introduced into Parliament within weeks of the budget, and the second in the early fall after the budget).  This seems to be the case notwithstanding the current status of the treaty shopping aspects of the BEPS Action Plan, described above.  In other words, Canada seems to be “going it alone”.

What does all this mean?

The potential impact of a Canadian domestic anti-treaty shopping rule will, of course, depend on what form the proposed rule ultimately takes.  However, at this point it seems like a very reasonable assumption that Canada will forge ahead with a domestic anti-treaty shopping rule and that the rule will take a form substantially similar to what was proposed in Budget 2014 and that is described above, notwithstanding the OECD public discussion draft released on March 14, 2014 recommending a treaty based approach to treaty shopping, not individual, domestic law approaches.

There are, of course, advantages and disadvantages to both a broadly based, general anti-avoidance approach such as the proposed rule and to a specific and detailed anti-avoidance type rule such as that which the US has generally adopted, an example of which can be found in the detailed “limitation of benefits” provisions in Article XXIX-A of the Canada-US Tax Convention.  A “main purpose” test is fraught with challenges and is not nearly as precise and predictable as the Department of Finance would have one believe.

Conduit Presumption Issues 

Some have argued, with good reason, that the “conduit presumption”, as currently proposed, is overly broad and particularly problematic, given that it seems that, as proposed,  it would “trump” the “safe harbour presumption”.  Unless narrowed, the conduit presumption will likely prove particularly problematic, if only because of the uncertainty that it will create, in almost any circumstance in which two or more parties join together in respect of an investment into Canada.  This would seem to be the case, for example, if two non-residents of Canada from different countries establish a joint vehicle in a third country (for which there can be many motivating reasons other than Canadian tax) through which to invest into Canada.  It would also seem to be the case for “collective investment vehicles”,  which would include anything from what might be considered to be conventional mutual funds to private equity funds (particularly for what are referred to in that industry as “downstream blockers”).

As noted above, the Minister and the Department took the somewhat unusual step of including examples in the Budget proposals of their views of the application or non-application of the proposed rule, which should be commended.  One of the examples related specifically to collective investment vehicles and provides some comfort in this regard.  It is hoped that the Department and the new Minister will provide further examples in respect of collective investment vehicles, the conduit presumption, and the proposed rule more generally,  in order to give all stakeholders more guidance and greater certainty as to the potential application of the proposed rule.

Relieving Provision

It is also uncertain how the relieving provision would apply, given that it would be based on what is “reasonable in the circumstances”.  It is trite to observe that what is “reasonable” depends on one’s perspective.  In this vein, the Budget 2014 proposals stated that:

Even if a transaction results in a tax treaty benefit for a taxpayer, it does not necessarily follow that one of the main purposes for undertaking the transaction was to obtain the benefit. One of the objectives of tax treaties is to encourage trade and investment and, therefore, it is expected that tax treaty benefits will generally be a relevant consideration in the decision of a resident of a state with which Canada has a tax treaty to invest in Canada. The proposed rule would not apply in respect of an ordinary commercial transaction solely because obtaining a tax treaty benefit was one of the considerations for making an investment.

Of course, what constitutes an “ordinary commercial transaction” also depends on one’s perspective.  Hopefully the Minister and the Department will provide further guidance in this regard, perhaps through further examples similar to those that were included in Budget 2014.

The relieving provision as described in Budget 2014 provides that “if the main purpose provision applies in respect of a benefit under a tax treaty, the benefit is to be provided, in whole or in part, to the extent that it is reasonable having regard to all the circumstances (emphasis added).  This would seem to suggest that a derivative benefits approach would be applied in providing such relief.  For example,  assume that the proposed rule  applies to deny treaty benefits to a corporation, “Bco”, that is resident in state B and is jointly owned by two shareholders, “Aco” and “Cco”, that are resident in states A and C respectively. Perhaps treaty benefits are denied because the conduit presumption is held to apply.  In this case treaty benefits may be available to Bco to the extent that its shareholders would have been entitled to the benefits of a treaty under which they qualify (this is discussed in Example 2 in Budget 2014).  While this seems simple enough in concept, one does not have to think too hard to realize that small changes in the facts can significantly complicate matters. (What if the shareholders of Bco change between when the relevant payments are received by Bco and when it makes payments to its shareholders?  What if one of the shareholders is itself jointly owned?)

As well, there have been some suggestions that, in determining the extent to which relief is to be provided, consideration of broader BEPS concerns, such as double non-taxation, should be considered (the second example in the Budget 2014 proposals suggests this).  Apart from the question of whether considerations beyond “treaty shopping” itself are appropriate in determining whether and to what extent treaty benefits are to be available in a particular circumstance, including such considerations in this analysis would make predicting the application of the proposed rule yet more, and perhaps impossibly, difficult.


Budget 2014 indicates that “the rule would apply to taxation years that commence after the enactment of the rule into Canadian law”.  This seems inordinately tight.  In the right (wrong?) circumstances it could have application to a taxpayer the day after enactment.  Changes to Canadian tax laws generally provide taxpayers with appropriate grandfathering for existing situations or a transition period to allow taxpayers to reorganize and adapt if grandfathering is inappropriate.  Hopefully this will be reconsidered.  Given the usual government practice noted above of enacting budget proposals in one of two “budget implementation acts”, if the proposed rule is included in the second budget implementation act and enacted before the end of the calendar year, the proposed rule could potentially have effect before the end of 2014.


It seems that the Canadian Minister of Finance and the Department of Finance plan to move forward with their anti-treaty shopping proposals, notwithstanding the March 14, 2014 BEPS Action Plan discussion draft and the very different approaches suggested therein.  As well, unless the coming-into-force is relaxed, the proposed rule could be in effect before the end of 2014.  Accordingly, non-residents of Canada and their tax advisors will have to pay close and immediate attention to developments in this regard, both with respect to the structuring of proposed investments into Canada and with respect to the structure of existing investment.  However, this may prove challenging.  Although aspects of the proposed rule, such as the “main purpose” test, derivative benefits that are “reasonable in the circumstances”, and expressed views that the proposed rule should not impact “normal commercial transactions”, can be superficially attractive, as noted above, one’s view of what is “reasonable” or “normal” depends on one’s perspective.  These will be challenging concepts for all stakeholders, be they taxpayers, their advisors (or auditors), or the CRA, to apply in practice.