Tax Insights: Preventing treaty shopping

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Finance seeks input on possible measures

Issue 2013-09

Canada has tax treaties with over 90 countries – one of the largest networks in the world.

The March 21, 2013 federal budget announced that the government would consult on possible measures that would protect the integrity of Canada’s tax treaties while preserving a business tax environment that is conducive to foreign investment. To fulfill this mandate, on August 12, 2013, Finance released its consultation paper targeting treaty shopping.

Finance will accept comments on this consultation paper up to December 13, 2013.

The consultation paper defines ‘treaty shopping’ generally as a situation in which a non-resident:

  • is not entitled to the benefits of a tax treaty with Canada
  • tries to obtain treaty benefits by using an entity resident in a country that has a tax treaty with Canada to earn, through that entity, income arising in Canada

The consultation paper invites comments on seven issues:

  1. the advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both
  2. the relative merits of the various approaches to treaty shopping identified by the OECD as well as whether there are other approaches and types of rules that should be considered by Canada in evaluating how best to address the problem of treaty shopping
  3. whether a general approach is preferred over a relatively more specific and objective approach
  4. whether a main purpose test, if enacted in domestic tax laws, would be effective in preventing treaty shopping and achieve an acceptable level of certainty for taxpayers
  5. which of the approaches (a main purpose approach or a more specific approach) strikes the best overall balance between effectiveness, certainty and simplicity, and ease of administration