Prior to the payment of dividends by Husky Energy Inc. to its shareholders in 2003, two of its shareholders (companies resident in Barbados) transferred their shares to companies in Luxembourg under securities lending arrangements, and therefore Husky Energy Inc. only withheld dividend tax at a reduced rate of 5% under the Canada-Luxembourg Income Tax Treaty. Judgment of the Court The Court found Husky Energy liable for failing to withhold dividend tax at the non-Convention rate of 25%. As the dividends were not paid to the Barbados companies, the 15% rate under the Canada – Barbados Income Tax Convention was not available. The Canada-Luxembourg Income Tax Convention rate was also not available as the Luxembourg companies were not the beneficial owners of the dividends as they were required to pay compensation to the Barbados companies equal to the dividends received. Excerpts “Under the securities lending arrangements, companies resident in Luxembourg enjoyed nothing more than temporary custodianship of the funds received in payment of the Dividends. The compensation payments were preordained by the terms of the borrowing requests, and this preordination ensured that at all times, the Barbcos retained their rights to the full economic value of the Dividends.” “For the foregoing reasons, HWEI and LF Luxembourg were not the beneficial owners of the Dividends for the purposes of Article 10(2) because they were legally obligated from the outset of the securities lending arrangements to return the full amount of the Dividends to the Barbcos in the form of the compensation payments. This was to occur no later than approximately seven weeks after the commencement of the securities lending arrangements. Consequently, HWEI and LF Luxembourg were not entitled to the benefit of the reduced rates of Part XIII tax provided under Article 10(2) and, for the purposes of subsections 215(1) and (6), the amount of tax under Part XIII that Husky was required to withhold and remit in respect of the Dividends was 25% of the Dividends.” “The fact that the Barbcos transferred their common shares in Husky to the Luxcos under atypical securities lending arrangements really has no bearing on whether the Transactions abuse Article 10(2). The rationale of Article 10(2) is to provide relief from double taxation by allocating the right to tax dividends between Canada and Luxembourg in accordance with the theory of economic allegiance while retaining the protections against the use of conduit‐type arrangements afforded by the beneficial owner requirement and the voting power requirement. Consistent with the theory of economic allegiance described by the majority in Alta Energy, which recognizes that a recipient of passive income need not have any allegiance to the paying country, the focus of the rationale of Article 10(2) is not how the common shares of Husky came to be owned by the Luxcos, but whether the Luxcos satisfy the residence requirement, the beneficial owner requirement and the voting power requirement. Since the hypothetical being considered assumes these requirements have been satisfied, I see no basis on which to find that the securities lending arrangements abused Article 10(2). VII. Conclusion For the foregoing reasons, the appeal of Husky is dismissed with costs to the Respondent, and the appeals of HWLH and LFMI are allowed with costs to HWLH and LFMI and the HWLH Assessment and the LFMI Assessment are vacated. While this is an unusual result, it flows from the fact that the Minister assessed the successors of the Barbcos and did not assess the Luxcos.” Click here for translations Canada vs Husky Energy Inc Dec 2023 ...

In 1992, Loblaw Financial Holdings Inc. (“Loblaw Financial”), a Canadian corporation, incorporated a subsidiary in Barbados. The Central Bank of Barbados issued a licence for the subsidiary to operate as an offshore bank named Glenhuron Bank Ltd. (“Glenhuron”). Between 1992 and 2000, important capital investments in Glenhuron were made by Loblaw Financial and affiliated companies (“Loblaw Group”). In 2013, Glenhuron was dissolved, and its assets were liquidated. For the 2001, 2002, 2003, 2004, 2005, 2008 and 2010 taxation years, Loblaw Financial did not include income earned by Glenhuron in its Canadian tax returns as foreign accrual property income (“FAPI”). Under the FAPI regime in the Income Tax Act (“ITA”), Canadian taxpayers must include income earned by their controlled foreign affiliates (“CFAs”) in their Canadian annual tax returns on an accrual basis if this income qualifies as FAPI. However, financial institutions that meet specific requirements benefit from an exception to the FAPI rules found in the definition of “investment business” at s. 95(1) of the ITA. The financial institution exception is available where the following requirements are met: (1) the CFA must be a foreign bank or another financial institution listed in the exception provision; (2) its activities must be regulated under foreign law; (3) the CFA must employ more than five full-time employees in the active conduct of its business; and (4) its business must be conducted principally with persons with whom it deals at arm’s length. Loblaw Financial claimed that Glenhuron’s activities were covered by the financial institution exception to the FAPI rules. The Minister disagreed with Loblaw Financial and reassessed it on the basis that the income earned by Glenhuron during the years in issue was FAPI. Loblaw Financial objected and appealed the reassessments. The Tax Court held that the financial institution exception did not apply, as Glenhuron’s business was conducted principally with non-arm’s length persons. In reaching its decision, the court considered the scope of Glenhuron’s relevant business, looking at its receipt of funds and use of funds. It included in its analysis all receipts of funds indiscriminately, treating capital injections by shareholders and lenders like any other receipt of funds. The Tax Court also viewed Glenhuron’s use of funds as the management of an investment portfolio on the Loblaw Group’s behalf and regarded the influence of the Loblaw Group’s central management as pervading the conduct of business because of the Loblaw Group’s close oversight of Glenhuron’s investment activities. The Federal Court of Appeal disagreed with the Tax Court’s interpretation of the arm’s length requirement and with its analysis based on receipt and use of funds. It held that only Glenhuron’s income-earning activities had to be considered. It also found that direction, support, and oversight by the Loblaw Group should not have been considered, because these interactions are not income-earning activities and thus do not amount to conducting business with the CFA. It concluded that Glenhuron was dealing principally with arm’s length persons, and that Loblaw Financial was entitled to the benefit of the financial institution exception and did not need to include Glenhuron’s income as FAPI. It referred the reassessments back to the Minister for reconsideration However, the Tax Court’s interpretation of a technical provision in the Canadian legislation had the consequence that Loblaw would nonetheless have to pay $368 million in taxes and penalties. Judgement of the Supreme Court The Supreme Court upheld the decision of the Federal Court and set aside the assessment. The tax exception did apply, so Loblaw Financial did not have to pay taxes on the money made by Glenhuron. The arm’s length requirement was met. According to the Court “the FAPI regime is one of the most complicated statutory regimes in Canadian law”, but the question in this appeal is simple. Is a company “doing business” with a foreign affiliate when it manages and gives money to it? No. When the arm’s length requirement in the Income Tax Act is read in its grammatical and ordinary sense, it is clear money and management to an affiliate is not included in “doing business”. Loblaw Financial managed and gave money to Glenhuron, but it was not doing business with it. Rather, as a corporate bank, Glenhuron was doing business with other companies not related to it. So, the arm’s length requirement was met. As a result, the tax exception applied, and Loblaw Financial did not have to pay taxes on the money made by Glenhuron for the years in question. Click here for other translation Canada vs Loblaw SC 2021 ...

ALTA Energy, a resident of Luxembourg, claimed an exemption from Canadian income tax under Article 13(5) of the Canada-Luxembourg Income Tax Treaty in respect of a large capital gain arising from the sale of shares of ALTA Canada, its wholly-owned Canadian subsidiary. At that time, Alta Canada carried on an unconventional shale oil business in the Duvernay shale oil formation situated in Northern Alberta. Alta Canada was granted the right to explore, drill and extract hydrocarbons from an area of the Duvernay formation designated under licenses granted by the government of Alberta. The Canadian tax authorities denied that the exemption applied and assessed ALTA Energy accordingly. Article 13(5) of the Canada-Luxembourg Tax Treaty is a distributive rule of last application. It applies only in the case where the capital gain is not otherwise taxable under paragraphs (1) to (4) of Article 13 of the Treaty. Article 13(4) is relevant to the outcome of this appeal. Under that provision, Canada has preserved its right to tax capital gains arising from the disposition of shares where the shares derive their value principally from immovable property situated in Canada. However, the application of Article 13(4) is subject to an important exception. Property that would otherwise qualify as Immovable Property is deemed not to be such property in the circumstances where the business of the corporation is carried on in the property (the “Excluded Property” exception). The tax authorities argued that the Shares derived their value principally from Alta Canada’s Working Interest in the Duvernay Formation. The authorities also argued that the capital gain it realized would be taxable under Article 13(4) unless the Court agreed with ALTA’s submission that its full Working Interest is Excluded Property. ALTA Energy appealed the position of the tax authorities and argued the contrary view. According to ALTA, substantially all of ALTA Canada’s Working Interest remained Immovable Property because ALTA Canada drilled in and extracted hydrocarbons from only a small area of the Duvernay Formation that it controlled. In 2018 the Federal Court of Appeal decided in favour of ALTA Energie and the matter was referred back for reconsideration and reassessment. This decision was then appealed by the tax authorities before the Supreme Court The Judgement of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities but with dissenting judges. Excerpts: [185] Nevertheless, we agree with Alta Luxembourg that treaty shopping is not inherently abusive. There is nothing necessarily improper about minimizing tax liability by selecting a beneficial tax regime in making an investment in a foreign jurisdiction (Crown Forest, at para. 49). Certain jurisdictions may provide tax incentives to attract businesses and investment; as such, taxpayers are entitled to avail themselves of such benefits to minimize tax. Thus, merely selecting a treaty to minimize tax, on its own, is not abusive. In fact, it may be consonant with one of the main purposes of tax treaties: encouraging trade and investment. [186] However, where taxing rights in a tax treaty are allocated on the basis of economic allegiance and conduit entities claim tax benefits despite the absence of any genuine economic connection with the state of residence, treaty shopping is, in our view, abusive. As Professors N. Bammens and L. De Broe explain, the use of “conduit companies” is disconnected from the objectives of bilateral tax treaties: . . . tax treaties are concluded for reasons of an economic nature: the contracting states want to stimulate reciprocal commercial relations by preventing double taxation. The use of conduit companies and treaty shopping structures has very little to do with this economic objective. Treaty shopping thus upsets the balance and reciprocity of the tax treaty: in order to preserve a tax treaty’s inherent reciprocity, its benefits must not be extended to persons not entitled to them. [Emphasis added; footnotes omitted.] (“Treaty Shopping and Avoidance of Abuse”, in Lang et al., Tax Treaties, 51, at p. 52; see also Li and Avella, at s. 2.1.1.3.) [187] In such cases, as here, the avoidance transaction would be contrary to the objectives of bilateral tax treaties and frustrate the object, spirit or purpose of the specific provisions related to the allocation of taxing rights. Preventing such abuse is the purpose of the GAAR: “. . . most double tax treaties do not contain specific limitations on the ability of third-country residents to treaty shop [and instead] rely on the concept of beneficial ownership or on domestic anti-abuse legislation to safeguard against hollow conduits” (Krishna (2009), at p. 540). Similarly, C. A. Brown and J. Bogle are of the view that the GAAR is “[t]he primary tool to fight treaty shopping in Canada currently” (“Treaty Shopping and the New Multilateral Tax Agreement — Is it Business as Usual in Canada?” (2020), 43 Dal. L.J. 1, at p. 4). [188] In conclusion, not all types of treaty shopping lead to abuse of a tax treaty. Only when an avoidance transaction frustrates the rationale of the relevant treaty provision will treaty shopping be abusive and the tax benefit denied. For instance, where contracting parties allocate taxing rights to the state of residence on the basis of economic allegiance, as in this case, treaty shopping will be abusive if the resident of a third-party state uses a conduit company to claim treaty benefits conferred by provisions requiring a genuine economic connection with the residence state. Therein lies the undermining of these provisions’ rationale clothed in a formalistic adherence to their text. Ignoring this is to render the GAAR empty of meaningful effect. Click here for other translation Alta_Energy_Luxembourg_SARL-en ...

On 23 September 2020, the Federal Administrative Court in Mexico issued a not yet published decision in a dispute between the Mexican tax authorities (SAT) and Canadian mining group First Majestic Silver Corp’s Mexican subsidiary, Primero Empresa Minera. The court case was filed back in 2015 by the tax authorities, to cancel an Advance Pricing Agreement (APA) issued to Primero Empresa Minera back in 2012. According to the APA, a methodology had been determined allowing the Mexican mining company to sell silver at 4.04 dollars per ounce to a group company based in Barbados (Silver Trading Barbados Ltd) via Luxembourg, when the average market price of silver was above 30 dollars. The APA was applied by Primero Empresa Minera for FY 2010 – 2014. The Federal Court decided in favor of the tax authorities that the APA was invalid and therefore nullified. After receiving the decision from the Federal Court, First Majestic on 25 September 2020 issued a press release stating that “the Federal Court’s decision was not arrived following regular procedures, was undertaken hastily, and did not provide opportunity for the presentation of evidence from PEM. In addition, the decision is inconsistent with previous legal precedents and violates the Federal Mexican Constitution. The Company continues to assess all of its legal options, both domestic and international including under the North American Free Trade Agreement, and will make additional updates, when necessary, on its legal plan of action.“ In a later press release dated 11 November 2020 it was announced that First Majestic intended to appeal the decision to the Circuit Court prior to the December 1, 2020 deadline. Prior to receiving the court’s decision, First Majestic had stated that, SAT illegally chose to ignore the legal existence of an advance pricing agreement and that to address the  unjustified conduct of the authorities the group would issue a notice of intent to submit a claim (notice) under the provisions of Chapter 11 of NAFTA trade agreement. This notice of intent was published in may 2020 . According to the notice, the amount of compensation to be claimed in the arbitration proceedings has been estimated by a minimum amount of $500 million, in addition to any applicable interest, costs and expenses of the arbitration proceedings. In a later press release from 10 March, First Majestic elaborates further on the case and background ...

AgraCity Canada had entered into a Services Agreement with a group company, NewAgco Barbados, in connection with the sale by NewAgco Barbados directly to Canadian farmer-users of a glyphosate-based herbicide (“ClearOut”) a generic version of Bayer-Monsanto’s RoundUp. In reassessing the taxable income of AgraCity for 2007 and 2008 the Canada Revenue Agency relied upon the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Income Tax Act (the “Act”) and re-allocated an amount equal to all of NewAgco Barbados’ profits from these sales activities to the income of AgraCity. According to the Canadian Revenue Agency the value created by the parties to the transactions did not align with what was credited to AgraCity and NewAgco Barbados. Hence, 100% of the net sales profits realized from the ClearOut sales by NewAgco Barbados to FNA members – according to the Revenue Agency – should have been AgraCity’s and none of those profits would have been NewAgco’s had they been dealing at arm’s length. “arm’s length commercial parties would never agree to let NewAgco Barbados have any of the profits if it served no function in the transactions given that it had no assets, employees, resources, or other role or value to contribute to the profit making enterprise or to bring thereto.” The Tax Court found that the purchase, sale, and related transactions with NewAgco Barbados were not a sham, nor was any individual transaction in the series of transactions beginning with the incorporation of NewAgco Barbados for the ClearOut sales activity a sham. The transactions that occurred and were documented were the transactions the parties intended, agreed to, and that the parties reported to others including the Canadian Revenue Agency. Any shortcomings in any paperwork was not intended to deceive the CRA or anyone else. Canada-vs-Agracity-Ltd ...

In the case of Canadian grocery chain Loblaw, the Canadian Tax Court in 2018 found that using an offshore banking affiliate in a low tax jurisdiction – Barbados – to manage the groups investments did not constitute tax avoidance. However, the Tax Court’s interpretation of a technical provision in the Canadian legislation had the consequence that Loblaw would nonetheless have to pay $368 million in taxes and penalties. This decision has now been overturned by the Canadian Court of Appeal where a judgement in favor of Loblaw was delivered in April 2020. Canada-vs-Loblaw-April-2020-SC ...

12 March 2019 the EU Council added ten jurisdictions to the list of Non-Cooperative Tax Jurisdictions – Tax Havens. Non-Cooperative Tax Jurisdictions are those that refused to engage with the EU or to address tax good governance shortcomings. See the full 2019 document with the Council’s conclusions on the revised EU list of noncooperative jurisdictions for tax purposes here. As of March 2019 the EU list of Non-Cooperative Tax Jurisdictions includes 15 countries: American Samoa Barbados Guam Samoa Trinidad and Tobago US Virgin Islands Aruba Belize Bermuda Dominica Fiji Marshall Islands Oman United Arab Emirates Vanuatu ...

ALTA Energy, a resident of Luxembourg, claimed an exemption from Canadian income tax under Article 13(5) of the Canada-Luxembourg Income Tax Treaty in respect of a large capital gain arising from the sale of shares of ALTA Canada, its wholly-owned Canadian subsidiary. At that time, Alta Canada carried on an unconventional shale oil business in the Duvernay shale oil formation situated in Northern Alberta. Alta Canada was granted the right to explore, drill and extract hydrocarbons from an area of the Duvernay formation designated under licenses granted by the government of Alberta. The Canadian tax authorities denied that the exemption applied and assessed ALTA Energy accordingly. Article 13(5) of the Canada-Luxembourg Tax Treaty is a distributive rule of last application. It applies only in the case where the capital gain is not otherwise taxable under paragraphs (1) to (4) of Article 13 of the Treaty. Article 13(4) is relevant to the outcome of this appeal. Under that provision, Canada has preserved its right to tax capital gains arising from the disposition of shares where the shares derive their value principally from immovable property situated in Canada. However, the application of Article 13(4) is subject to an important exception. Property that would otherwise qualify as Immovable Property is deemed not to be such property in the circumstances where the business of the corporation is carried on in the property (the “Excluded Property” exception). The tax authorities argued that the Shares derived their value principally from Alta Canada’s Working Interest in the Duvernay Formation. The authorities also argued that the capital gain it realized would be taxable under Article 13(4) unless the Court agreed with ALTA’s submission that its full Working Interest is Excluded Property. ALTA Energy appealed the position of the tax authorities and argued the contrary view. According to ALTA, substantially all of ALTA Canada’s Working Interest remained Immovable Property because ALTA Canada drilled in and extracted hydrocarbons from only a small area of the Duvernay Formation that it controlled. The Judgement of the Court The appeal was allowed and the matter referred back to the tax authorities for reconsideration and reassessment. Canada vs ALTA ENERGY lux 24 sep 2018 tcc152 ...

Oxfam’s list of Tax Havens, in order of significance are: (1) Bermuda (2) the Cayman Islands (3) the Netherlands (4) Switzerland (5) Singapore (6) Ireland (7) Luxembourg (8) Curaçao (9) Hong Kong (10) Cyprus (11) Bahamas (12) Jersey (13) Barbados, (14) Mauritius and (15) the British Virgin Islands. Most notably is The Netherlands placement as no. 3 on the list. Oxfam researchers compiled the list by assessing the extent to which countries employ the most damaging tax policies, such as zero corporate tax rates, the provision of unfair and unproductive tax incentives, and a lack of cooperation with international processes against tax avoidance (including measures to increase financial transparency). Many of the countries on the list have been implicated in tax scandals. For example Ireland hit the headlines over a tax deal with Apple that enabled the global tech giant to pay a 0.005 percent corporate tax rate in the country. And the British Virgin Islands is home to more than half of the 200,000 offshore companies set up by Mossack Fonseca – the law firm at the heart of the Panama Papers scandal. The United Kingdom does not feature on the list, but four territories that the United Kingdom is ultimately responsible for do appear: the Cayman Islands, Jersey, Bermuda and the British Virgin Islands ...

The intercompany transactions at issue involved fees paid to the company’s wholly-owned Barbados based subsidiary during taxation years 2000 and 2001 for sales, marketing and support services. The Tax Court of Canada had determined that it was appropriate to apply the CUP method rather than the TNMM, which was advocated by the company’s expert. Canada’s Federal Court of Appeal upheld the decision by the Tax Court of Canada, which in 2014 ruled that the Canada Revenue Agency had largely been correct in reassessing the taxable income of Marzen Artistic Aluminum Ltd. Canada vs Marzen-v-the-Queen ...

Alberta Printed Circuits Ltd (APC, the taxpayer) was a Canadian manufacturer of custom prototype circuit boards. The manufacturing process was initially manual and later automated. In 1996, a Barbados company, APCI Inc.,  was formed via a complex ownership structure. The Barbados company provided services to Alberta Printed Circuits Ltd. by performing setup functions, software and website development, and maintenance services. APCI charged the appellant a fixed fee for the setup services and a square-inch fee for non-setup services. Alberta Printed Circuits Ltd charged the same fee for the same services to third-party customers. The tax authorities asserted that the Alberta Printed Circuits Ltd overpaid APCI $3.4 million because the terms and conditions of the agreements differed from those that would have been entered at arm’s length. Alberta Printed Circuits Ltd provided evidence of internal comparable transactions and transfer prices were determined by the comparable uncontrolled price (CUP) method. The court held that the price paid to APCI for the setup fees was arm’s length. It allowed the appeal for those amounts but found that the appellant failed to establish that it did not overpay for the non-setup services. The court disagreed with the CRA’s application of the transactional net margin method. The TCC judge instead accepted the hierarchy of methods established in the 1995 OECD guidelines, which shows a preference for traditional transaction methods and cites the CUP method as providing the highest degree of comparability. Thus, the court preferred the appellant’s internal comparable transactions. Case No 2011 TCC 232 Canada vs Alberta Printed Circuits 2011 ...