Federal Court of Appeal Upholds Lower Court Decision

15 December 2011

In January 2011, Saipem UK Limited v The Queen[1] was released as the first substantive decision by a Canadian Court to discuss the application of the non-discrimination article of a Canadian tax treaty. More particularly, the decision dealt with whether subsection 88(1.1) of the Income Tax Act (Canada) (“Act”)[2] was discriminatory and should be overridden by Article 22 of the Canada-United Kingdom Tax Convention (“Treaty”).[3]

In Saipem, the taxpayer was a resident of the UK, and had carried on an active business in Canada through a permanent establishment (“PE”) from 2004 to 2006. Saipem’s subsidiary, also a UK resident, also carried on an active business in Canada through a PE, but from 2001 to 2003. In 2003, the subsidiary was wound up into the parent, and from 2004 to 2006, the parent claimed the losses incurred in the subsidiary from the previous years in calculating its tax payable.  In short, the parent corporation ignored the restrictions in subsection 88(1.1) of the Act, the provision which otherwise would have allowed for the carryover of the subsidiary losses had the two corporations been Canadian corporations, on the basis they were discriminatory and were in contravention of Article 22 of the Treaty.

In their decision, the Tax Court of Canada (“Tax Court”) concluded that subsection 88(1.1) does not discriminate based strictly on nationality, but rather discriminates based on residence.  The court found that this was permissive, given the explicit language of the section.  Justice Angers noted that the requirement that a comparative group be “in the same circumstances”[4] required that residence be a factor to be considered when deciding whether a taxpayer is being discriminated against.  The court also held that paragraph 2 of Article 22 of the Treaty only applies to the taxation of an entity’s own activities, and does not account for any relationship that the entity may have with other enterprises which would allow the transfer of losses.

More recently, on September 6, 2011, the Federal Court of Appeal heard Saipem’s objections to the Tax Court’s findings, but upheld the Tax Court’s decision.[5]  It held that the provisions of the Act do indeed discriminate based on residency and not based on nationality and therefore do not constitute discrimination under the Treaty, nor did the provisions at issue offend the principles set out in paragraph 2 of Article 22 of the Treaty, also discussed in the article cited above.

The Federal Court of Appeal rejected the argument that Canada should be precluded from discriminating against a taxpayer on the basis of residency, stating that there is nothing in the Treaty which would support this view.  The appeal was dismissed with costs.

Given that the timeline has lapsed within which Saipem would be able to appeal its decision to the Supreme Court of Canada, it appears as though the Tax Court’s rulings with respect to non-discrimination and the residence requirement are here to stay until another case makes its way through the court.


[1]Saipem UK Limited v. The Queen, 2011 TCC 25 (decision rendered on January 14, 2011).

[2]Income Tax Act, RSC 1985, (5th Supp), c 1.

[3]Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, as amended.

[4] As found in paragraph 1 of Article 24 of the Organisation for Economic Co-operation and Development’s Model Tax Convention on Income and on Capital and Canada’s treaties in general.


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