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TCC Rules On First Canadian Non-Discrimination Treaty Case


One of the purposes of tax treaties is to encourage international trade and investment. Discriminatory taxation runs counter to that purpose. The prevention of discriminatory taxation is therefore an important role of tax treaties. It is then surprising to think that until this year, a Canadian court had yet to rule on a case involving the non-discrimination article of Canada's bilateral tax treaties.

Taxand Canada analyses the non-discrimination article of the "Model Tax Convention on Income and on Capital" (the "Model") of the Organisation for Economic Co-operation and Development ("OECD") and how it differs from Canada's tax treaties.

Canada has registered a reservation on the Article as a whole, as it does not accept the broad principle of non-discrimination which is encouraged in the Model. The recent Tax Court of Canada decision against Saipem UK Ltd was based on the premise that Saipem UK and its subsidiary SEI were not "Canadian corporations" as required under subsection 88(1.1) of the Income Tax Act (Canada). Saipem UK argued that the limited application of subsection 88(1.1) of the Act to Canadian corporations violated Saipem UK's right to non-discrimination in accordance with Article 22 of the Canada-United Kingdom Tax Convention (the "Treaty").

Taxand's Take

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.

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