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Tax Execs Challenge Canadian Treaty Shopping Plans

by Mike Godfrey,, Washington

18 April 2014

The Tax Executives Institute (TEI) has expressed its regret that the Canadian Government has released draft legislation on so-called "treaty shopping" before the scope of the perceived treaty abuse problem has been quantified and disclosed.

In a letter to the Canadian Finance Minister, Joe Oliver, the TEI warns that "if access to treaty benefits is to be denied, the effort can only be effective if done in a manner that ensures certainty, fairness, and simplicity for taxpayers, and ease of administration for the Canada Revenue Agency (CRA)." To that end, the TEI suggests that Canada should adopt the approach of negotiating objective Limitation of Benefits (LOB) clauses in particular treaties. It should do this in preference to "enacting a general and amorphous anti-treaty-abuse provision in its domestic legislation."

A further problem identified by the TEI relates to the practicality of determining whether "one of the main purposes" of a transaction is to obtain a treaty benefit. The TEI recommends that the intended "main purpose" approach be shelved, and an objective, specific test should be devised in its place. Were the main purpose test implemented, taxpayers and the CRA would need substantial guidance and examples to clarify its application, it said.

The letter also sets out a blueprint for a safe harbor. It would apply where an intermediary company is listed on a prescribed stock exchange in the contracting countries or is a subsidiary of a listed company, and where a taxpayer can demonstrate that there is no treaty-shopping motivation or there is a clear business reason for the existence of an intermediary company. It would need to be proven that no tax benefit has been received or that the tax benefits received are less than a de minimis amount.

Finally, the TEI urges that a scheme to expand the thin cap rules to financing arrangements typically known as "back-to-back loans" be abandoned. The proposals are described as "overbroad, sweeping in far too many ordinary and necessary commercial financing arrangements." The TEI queries the definition of a back-to-back loan, and argues that the intended transitional period is too short. It is calling on the Finance Department to "clarify the treatment of guarantees and pledges and ensure that important exclusions, limitations, or qualifications are clearly reflected in the draft legislation rather than in just the Budget Notes."

TAGS: compliance | Finance | tax | business | tax compliance | tax avoidance | tax incentives | ministry of finance | tax authority | legislation | tax planning | transfer pricing | Canada | trade association | trade | Tax | Tax Evasion

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