Saipem UK Limited v the Queen1 is the first Canadian case wherein the Tax Court of Canada has decided with respect to the anti-discrimination provisions contained in a Canadian tax convention, being Article 22 of the Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland2 (Treaty).
In Saipem, Saipem UK Limited (the Appellant) and a related corporation, Saipem Energy International Limited (SEI), were both incorporated in the United Kingdom (UK) and non-residents of Canada. SEI carried on business in Canada during its 2001-2003 taxation years through a permanent establishment. In the course of carrying on its business, SEI incurred $7,033,957 in non-capital losses. On November 21, 2003, the Appellant’s board of directors decided to purchase all outstanding SEI shares and to wind it up. On December 16, 2003, all of SEI’s shares were transferred to the Appellant, and on October 13, 2006, SEI was wound up and struck off the register of the UK Companies House.
The Appellant also carried on business in Canada through a permanent establishment in 2004, 2005 and 2006. For those taxation years, the Appellant deducted SEI’s losses in the amounts of $592,697, $839,799 and $5,601,461, respectively, in the course of computing its taxable income in Canada. The Minister of National Revenue (MNR) reassessed the Appellant in respect of its 2004-2006 taxation years and denied its deduction of SEI’s losses. The MNR held that neither the Appellant nor SEI were "Canadian corporations" as defined in subsection 89(1) of the Income Tax Act (Canada)3 (Act) and as required by subsection 88(1.1) of the Act.
Subsection 88(1.1) of the Act permits a parent corporation to use the non-capital losses of a subsidiary corporation that has been dissolved where the parent owned at least 90 per cent of the subsidiary's issued shares immediately prior to the wind-up. However, subsection 88(1.1) of the Act only applies where, among other things, the parent and subsidiary are "Canadian Corporations." The term "Canadian corporation" is defined in subsection 89(1) of the Act as a corporation that is at a given time resident in Canada at that time, and was either incorporated in Canada or has been resident in Canada throughout the period that began on June 18, 1971 and that ends at that time.
The Appellant’s Position
The Appellant argued that the MNR’s denial of its deduction of SEI’s losses was contrary to Article 22(1) of the Treaty, which provides:
The 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. (Emphasis added.)
Specifically, the Appellant’s principal arguments included that the residency and incorporation requirements in subsection 89(1) of the Act mean that only nationals of Canada could benefit from the provisions of subsection 88(1.1) of the Act. The Appellant also argued that the phrase "in the same circumstances" as contained in Article 22(1) of the Treaty does not contemplate residency such that the Appellant and a Canadian corporation carrying on a similar business are in the same circumstances, even though one is a resident and one is not.
The Appellant also argued that based on Article 22(2) of the Treaty, which reads in part "the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities," non-resident enterprises benefit from Sections 111 and 115 of the Act and pursuant to Article 22(2) of the Treaty should benefit from subsection 88(1.1) of the Act.
Given the lack of Canadian decisions with respect to anti-discrimination provisions in Canadian tax treaties, the court considered a New Zealand decision where the New Zealand Court of Appeal was asked to interpret a similarly worded anti-discrimination provision. In that case, the New Zealand Court of Appeal concluded that discrimination on the basis of residence does not amount to discrimination on the basis of nationality for the purpose of the anti-discrimination provision in the Double Taxation Relief Agreement between the UK and New Zealand,4 which is worded similarly to Article 22 of the Treaty.
The court considered the Appellant’s first argument with respect to the application of Article 22(1) of the Treaty and concluded that paragraph (a) of the definition of "Canadian corporation" imposes a nationality requirement, but paragraph (b) does not. Specifically, subsections 250(4) and 250(5) provide that a corporation that was not incorporated in Canada can be a resident of Canada and a corporation that was incorporated in Canada can be deemed not to be a resident of Canada. Thus, qualifying as a Canadian corporation for purposes of subsection 88(1.1) of the Act is not dependent on a corporation’s nationality.
In response to the Appellant’s second argument that the phrase "in the same circumstances" does not contemplate residency, the court held that residence is relevant to establish if parties are in the same circumstances. The court found that for purposes of Article 22(1) of the Treaty, the proper comparison would be between the Appellant and a Canadian national who was not resident in Canada and who dissolved a subsidiary corporation. Based on this comparison, Article 22(1) of the Treaty does not apply since a comparable Canadian national who is not resident in Canada would not qualify as a Canadian corporation and would not benefit from subsection 88(1.1) of the Act.
Lastly, in accordance with the commentary to the OECD Model Convention and Article 7 of the Treaty (Business Profits), the court found that permanent establishments may carry forward or carry back a loss only where the loss is from its own business activities. Since the Appellant was seeking to deduct a loss that did not result from its permanent establishment, such a deduction was not permitted under Article 7 of the Treaty. Consequently, the court concluded that the MNR’s denial of the Appellant’s deduction of SEI’s losses did not violate Article 22(2) of the Treaty.
As previously noted, this is the first Canadian decision on an anti-discrimination article in a Canadian tax treaty, which is somewhat remarkable given the fact that most of Canada’s tax treaties contain anti-discrimination provisions. This case follows the Supreme Court of Canada’s decision in Crown Forest Industries Ltd. v. R.5 and the Federal Court of Appeal’s decision in Prévost Car Inc. v. R.6 in that the court made liberal use of the commentary to the OECD Model Convention as an aid in interpreting a Canadian tax treaty. Although not surprising, this decision also confirms that residency is key in determining if a corporation is a "Canadian corporation," not nationality. Lastly, and most noteworthily, the decision in Saipem also confirms that a distinction based on a taxpayer’s residence is not discriminatory under Article 22 of the Treaty.