On September 6, 2011, the Federal Court of Appeal (Nadon, Trudel and Mainville, JJ.A.) heard an appeal by Saipem UK Limited (“Saipem UK”) against a decision of the Tax Court of Canada interpreting Article 22 of the Canada-UK Tax Treaty. The appeal was dismissed from the bench with costs.

The Tax Court had dismissed Saipem’s appeal and held that subsection 88(1.1) of the Income Tax Act does not discriminate on the basis of nationality since the determination of whether a corporation is a “Canadian corporation” is not dependent on a corporation’s nationality (i.e., a corporation incorporated outside Canada may be a Canadian resident based on the “management and control” test).

Mr. Justice Nadon delivered the following reasons for judgment:

[1] Notwithstanding Mr. Lefebvre’s forceful arguments, we have not been persuaded that the judge made any error which would allow us to intervene.

[2] More particularly, with regard to article 22(1) of the Canada – United Kingdom Tax Convention (the Tax Treaty), we are all of the view, substantially for the reasons given by the judge, that the provisions of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) as amended, at issue discriminate on the basis of residency and not nationality and, as a result, do not constitute discrimination against the Appellant under the Tax Treaty. With regard to article 22(2) of the Tax Treaty, we are all of the view, also for the reasons given by the judge, that the provisions at issue do not constitute less favourable treatment of the Appellant.

[3] In the end, Mr. Lefebvre’s argument, in effect, is that Canada should not be allowed, in the particular circumstances of this case, to discriminate against the Appellant on the basis of residency. Unfortunately, there is nothing in the Tax Treaty to support that view.

[4] Consequently, the appeal will be dismissed with costs in favour of the Respondent.

See our earlier post on the Saipem case.