As indicated in Economic Action Plan 2013, the Government continues to actively negotiate and conclude tax treaties to reduce barriers to international trade and investment, combat tax evasion and avoidance, strengthen Canada’s bilateral economic relationships, and create enhanced opportunities for Canadian businesses abroad. Tax treaties generally promote these economic objectives by establishing rules for the prevention of double taxation and reducing rates of withholding taxes imposed on cross-border payments. Canada now has more than 90 tax treaties in force, and more under negotiation, and is committed to maintaining an extensive and effective tax treaty network.
At the same time, insofar as another purpose of tax treaties is to prevent tax avoidance and evasion, it is important that safeguards exist to ensure that taxpayers cannot make improper use of Canada’s tax treaties. Treaty shopping arises when, for example, a person who is not entitled to the benefits of a tax treaty with Canada uses an entity in a country with which Canada has concluded a tax treaty and, to obtain Canadian tax benefits, earns or realizes income sourced in Canada indirectly through that entity. As described in sections 1 and 5 below, treaty shopping defeats the purposes of Canada’s bilateral tax treaties and poses risks to the Canadian tax base.
Distinguishing between acceptable uses of a tax treaty and treaty shopping can be difficult given the complexity of international transactions and the increasing sophistication of international tax planning. Nevertheless, there is both direct and circumstantial evidence that treaty shopping exists and that the unintended consequences of treaty shopping are significant. Many other countries are better positioned to address treaty shopping, either as a result of favourable judicial decisions or having taken more decisive steps to address treaty shopping in their domestic laws or tax treaties.
The intention of this consultation process is to examine a range of possible approaches to address the practice of treaty shopping into Canada. The purpose of this paper is to serve as the basis for a discussion aimed at reaching a workable solution to the problem of treaty shopping. In finding a solution to treaty shopping, the main goals are to ensure that Canada remains an attractive destination for foreign investors and that all of the purposes of Canada’s tax treaties are achieved.
The first section of this paper defines treaty shopping. The second section sets out Canada’s position on treaty shopping and the third section discusses recent judicial experience. The fourth section describes the evidence of treaty shopping and the fifth section explains unintended consequences of treaty shopping. The sixth section canvasses the possible approaches to preventing treaty shopping. The seventh section explores approaches for striking a balance between general and specific rules. The eighth section concludes with a description of the consultative process. Finally, the ninth section summarizes questions and issues on which the Government invites stakeholders’ comments.
Treaty Shopping – The Problem and Possible Solutions
Introduction
1. Treaty Shopping – The Hallmarks
2. Canada’s Position on Treaty Shopping
3. Canada’s Judicial Experience
4. Evidence of Treaty Shopping
5. Unintended Consequences of Treaty Shopping
6. Possible Approaches to Preventing Treaty Shopping
6.1 Overview and tax policy objectives
6.2 Domestic tax rules or treaty-based rules
6.3 General or specific anti-treaty shopping rules
6.4 The use of general or specific approaches – considerations in the Canadian context
7. Striking a Balance Between General and Specific Rules
7.1 Considerations regarding effectiveness and certainty
7.2 Dealing with the difficult cases
7.3 The interaction between domestic law and treaty-based approaches
8. Consultative Process
9. Summary of the Questions
ANNEX
1 - OECD Position on Improper Use of Tax Treaties
2 – UN Model Commentary Concerning Specific and General Legislative Anti-abuse Rules in Domestic Law
3 – Other Countries’ Experience Dealing With Treaty shopping
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