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Canadian Treaty Update
It is generally well understood that the primary purpose of an income tax treaty is to avoid double taxation. One common cause of juridical double taxation is where there are timing differences between the income recognition tax laws of two Contracting States. The OECD Model Tax Convention on Income and on Capital (the "OECD Model") addresses these timing mismatches by attempting to put some obligation on Resident States to rectify the double tax by providing relief regardless of when the tax is levied by the Source State. Taxand Canada provides an update on current developments of a number of treaties.
Article XIII(8) of the Canada - US Treaty
This article is not being administered at the Canadian Competent Authority as was originally expected. Taxpayers and their advisors should not assume that the provision will apply in all cross border reorganisations where there is a timing mismatch. Early discussions with the Canadian Competent Authority should be done before significant hours and resources are invested preparing Article XIII(8) submissions. This will ensure that if there are policy impediments that would otherwise prevent the Canadian Competent Authority from entering into an agreement, it is at least brought to the attention of the taxpayer and their advisor at a very early stage. Also, some specialised tax planning may be a good idea before the transactions are actually carried out to avoid unfavourable tax treatment.
Article XV(2) of the Canada - US Treaty - Problems Impacting Canadian Employees Working in the US
The 5th Protocol to the Canada-United States Tax Convention (1980) (the "Treaty"), which came into effect on 15 December 2008, introduced several significant and highly anticipated changes to the Treaty. There were also several minor amendments made to the Treaty, including one that was intended only to be clarifying in nature. There is evidence that some auditors of the Internal Revenue Service ("IRS") are interpreting the amendment to Article XV in a manner that goes beyond what was intended by the Treaty negotiators. If a trend begins to develop, this could have major ramifications on cross-border services, particularly intra-group services where Canadian employees are sent to work in the U.S. for short periods of time.
TCC Rules on First Canadian Non-Discrimination Treaty Case: Saipem UK Limited v. The Queen
This case is significant as it offers the first judicial guidance in Canada regarding the non-discrimination article of one of its tax treaties. The Court, in applying and interpreting the expression "in the same circumstances", confirmed that the residence of the taxpayers is one of the factors that must be taken into account when determining whether the taxpayers are placed in similar circumstances for the non-discrimination provision to apply. Even though the Court ruled against the appellant, the Court did describe certain situations where the non-discrimination provisions of the Treaty could apply.
Canada / Switzerland: Double Tax Treaty to Meet OECD's Standard on Information Exchange
On 22 October 2010 the Government of Canada and Swiss Federal Council signed a protocol ("Protocol") to amend the 1997 Convention between Canada and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital ("Convention"). The Protocol will introduce some significant changes, particularly with respect to the exchange of information between Canada and Switzerland, as well as for payments of dividends, interest, royalties. It will also bring the Convention in line with the Swiss Federal Council's March 2009 mandate to provide greater administrative assistance and will reduce some of the privacy Canadians enjoyed in respect of their tax affairs in Switzerland. It will also provide favourable tax treatment that will enhance private equity investment in Canada and Switzerland.
The various treaties outlined above will have far-reaching implications for a number of multinationals. Such organisations
are therefore urged to seek appropriate advice to ensure they are fully compliant at all times.
Your Taxand contacts for further queries are:
T. +1 613 786 0196
Pierre G Alary
T.+1 613 786 0132