Tax memo: TCC rules in favour of Velcro Canada

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Beneficial ownership for tax treaty purposes

Memo No. 2012-09

On February 24, 2012, the Tax Court of Canada (TCC) released its decision in Velcro Canada Inc. v. The Queen.  Velcro Canada is only the second Canadian case to consider the meaning of “beneficial owner” in the context of the interest, dividend and royalty provisions of Canada’s tax treaties. The first was Prévost Car Inc. v. The Queen,  which dealt with whether the recipient of a dividend paid by a Canadian company was the beneficial owner of the dividend. In Velcro Canada, the payment at issue was a royalty.

The principles established in Velcro Canada (along with Prévost) are important for taxpayers paying interest, dividends or royalties to a resident of a treaty country, in determining whether the recipient is the “beneficial owner” of the payment.

In particular, the TCC’s decision in Velcro Canada, which is in the taxpayer’s favour, is significant because the TCC:

  • applied the Federal Court of Appeals’ approach in Prévost, in which that Court found that the separate legal existence of a holding company could be looked through only if the holding company was a true conduit for another entity, in the sense that it was a mere nominee or agent or had absolutely no discretion as to the use or application of funds put through it; and
  • found that the contractual obligation to pay a certain amount of money to another party did not mean that there was an automated flow of specific monies such that the recipient of those monies was not their beneficial owner.