On Thursday, February 26, 2009, the Federal Court of Appeal reaffirmed the importance of "certainty and stability" in the interpretation of bilateral income tax treaties with the release of its decision in The Queen v. Prévost Car, Inc. The Federal Court of Appeal unanimously upheld the lower court’s decision that a Dutch holding company was the "beneficial owner" of dividends received from its Canadian subsidiary for purposes of the tax treaty between Canada and the Netherlands. Please click here for prior coverage of the lower court’s decision. In so doing, the Court refused to adopt the ambiguous and flexible meaning of "beneficial owner" put forward by the Canada Revenue Agency.
This is a significant victory, not only for the taxpayer in this case, but for any multinational enterprise that requires certainty and stability concerning the availability of reduced withholding tax rates offered under bilateral income tax treaties regarding the cross-border payment of interest, dividends and royalties. The Federal Court of Appeal provides clear guidance on the circumstances in which a foreign holding company will be respected as the "beneficial owner" for treaty purposes and further provides useful guidance concerning the relevance of the commentaries produced by the Organisation for Economic Cooperation and Development (the "OECD") in interpreting and applying bilateral income tax treaties. As stated by the Court:
Counsel for the Crown has invited the Court to determine that "beneficial owner", "beneficiaire effectif", "mean the person who can, in fact, ultimately benefit from the dividend". That proposed definition does not appear anywhere in the OECD documents and the very use of the word "can" opens up a myriad of possibilities which would jeopardize the relative degree of certainty and stability that tax treaties seek to achieve. The Crown, it seems to me, is asking the Court to adopt a pejorative view of holding companies which neither Canadian domestic law, the international community nor the Canadian government through the process of objection, have adopted.
It is unclear at this time whether the Canada Revenue Agency will seek leave to appeal this decision to the Supreme Court of Canada.