New Limitation on Benefits Provisions in Canada's Tax Treaties - A Step Too Far?

01 July 2013

This article was authored by Jim Wilson and Eric Koh.

Canada’s tax treaties with foreign countries routinely include a variety of anti-abuse or treaty shopping provisions aimed at those structures or transactions utilized to improperly access treaty benefits. These provisions, commonly referred to as limitation on benefits (“LOB”) provisions1 generally seek to deny the benefits of the tax treaty, or the benefits of a particular provision in the tax treaty, where the conditions of that rule are met. Common examples of LOB provisions found in Canada’s tax treaties are beneficial ownership rules,2 and look-through or conduit company provisions.3 In the case of the Canada-United States Tax Convention (1980) (“Canada-U.S. Treaty”), Canada follows the U.S. approach and includes a comprehensive LOB Article4 to address treaty shopping. According to the Commentary, a “guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions.”5

Recent Canadian court decisions against the Government of Canada (“Government”) on the issue of “beneficial ownership” appear to have spurred the Department of Finance to alter Canada’s tax treaty policies and introduce modified LOB provisions aimed at protecting source taxation rights of interest, dividends, and royalty payments (“Modified LOB Provisions”). This article will analyze the significant, and likely unintended, impact that these Modified LOB Provisions will have on certain taxpayers and certain commonly employed tax structures. The analysis will focus on the use of these Modified LOB Provisions as recently introduced in the Canada-Hong Kong Income Tax Agreement6 (“HK Treaty”). Given the potentially broad reach of the Modified LOB Provisions in the HK Treaty, taxpayers and their tax advisors should be careful when devising strategies to take advantage of treaty benefits under the HK Treaty, even where the ultimate shareholders of a given entity are residents of the Contracting States.

In the federal budget released on March 21, 2013, the Government introduced a large number of “integrity” measures to tighten up several aspects of our tax system including international non-compliance. The budget also proposed various consultations on potential integrity measures, including measures to combat treaty shopping which will be the subject of a consultation paper the Government intends to release to stakeholders. The Government’s decision to enter into a consultation on treaty shopping, the timing of which coincides with the recent OECD report entitled “Addressing Base Erosion and Profit Shifting”, is clearly based on a combination of concerns, only one of which is the Government’s recent lack of success before the Canadian courts on the issue of “beneficial ownership”. Regardless, it is hoped that the issues described in this article pertaining to the Modified LOB Provisions will be taken under consideration in this consultation process.   

Background – Judicial Setbacks

Nearly three years after the Federal Court of Appeal upheld the decision of the Tax Court of Canada (“TCC”) in favor of the taxpayer in Prévost Car Inc. v. R. (“Prévost”),7 the TCC dealt another setback to the Canada Revenue Agency (“CRA”) in Velcro Canada Inc. v. R. (“Velcro”).8 Velcro revisited the issue of “beneficial ownership” in the context of Canadian withholding tax on cross-border royalty payments between related parties. Given that the issues and facts in Velcro were very similar to those in Prévost, it is not surprising that the TCC ruled in favor of the taxpayer in Velcro.

In Velcro, beginning in 1987, the taxpayer licensed intellectual property from Velcro Industries BV (“VIBV”), and paid royalties to VIBV based on a percentage of the taxpayer’s net sales. Between 1987 and October 1995, VIBV was a resident of the Netherlands, and the taxpayer withheld taxes on royalty payments to VIBV at reduced rates in accordance with Canada’s tax treaty with the Netherlands. In October 1995, VIBV migrated to a non-treaty country, the Netherlands Antilles, and assigned its rights under the licensing agreement with the taxpayer to a subsidiary resident in the Netherlands, Velcro Holdings BV (“VHBV”). After the assignment, the taxpayer continued to withhold taxes on royalty payments to VHBV at the reduced treaty rates. VHBV was obligated to forward a large percentage of the royalties received to VIBV. In effect, even though VIBV was no longer a resident of the Netherlands, the assignment of the licensing agreement allowed it to continue to extract royalties out of Canada at treaty reduced rates. CRA reassessed the taxpayer and took the position that VIBV, a resident of a non-treaty country, remained the beneficial owner of the royalty payments, and the taxpayer therefore should have withheld and remitted withholding tax at the statutory rate of 25% on the royalties to VHBV.  

At trial, the Crown argued that VHBV was not the beneficial owner, that VHBV was merely an agent or conduit, and that VHBV did not exercise the “incidences of ownership” as required by Prévost. In addition, the Crown contended that Prévost was distinguishable because of VHBV’s contractual obligation to forward a portion of any royalties received to VIBV. The TCC examined and analyzed the four elements of beneficial ownership from Prévost, and rejected the Crown’s arguments. It held that VHBV had possession, use, risk and control of the royalties, and was therefore the beneficial owner of the royalties.

The TCC began its analysis by considering the ordinary meaning of the four elements. With respect to “possession”, the TCC concluded that VHBV exercised dominion over the royalties, and listed a set of factors in support of its conclusion. For example, VHBV deposited the royalties in its own account, the royalties were commingled with its other funds in the account, interest earned on the funds was credited to VHBV, and some of the funds were used to cover VHBV’s expenses. The TCC also found that VHBV had “use” of the royalties because the royalties were commingled with its own funds, and used for various purposes such as paying expenses and investments. Even though VHBV had a contractual obligation to pay certain amounts to VIBV, there were no restrictions on the use of the royalties by VHBV. On the element of “risk”, the TCC ruled that VHBV was exposed to risks of economic loss from foreign exchange fluctuations given that the royalties had to be converted to U.S. or Dutch funds, and the fact that the royalties could be seized by VHBV’s creditors. Finally, based on its analysis of the prior three elements, the TCC also found that VHBV had “control” over the royalties. 

On the issue of agency, the TCC held that VHBV was not an agent of VIBV as it was unable to affect the legal position of VIBV. Nor was VHBV a conduit as it had discretion on the use and application of the royalties it received from the taxpayer. According to the TCC, in order for VHBC to be a conduit, it had to have absolutely no discretion over the funds.

Based on Prévost and Velcro, it is readily apparent that the determination of “beneficial ownership” is a question of fact. Therefore, while these decisions favored the taxpayer, there is still an element of risk in adopting such tax structures. In addition, despite the adverse decisions in Prévost and Velcro, CRA has indicated that it will continue to challenge such tax structures under the beneficial ownership rule where the facts can be distinguished from Prévost and Velcro.9 Such statements by CRA, although an act of desperation, are understandable since, in the absence of an adequate LOB provision in a treaty, it currently has very few tools to effectively combat treaty shopping.

Modified and Expanded LOB Provisions Relating to Source Taxation of Specific Types of Income10

Even prior to the Government’s decision to release a consultation paper on treaty shopping, it appeared that the Government wanted to strengthen CRA’s position in dealing with such tax structures by introducing the Modified LOB Provisions in Canada’s recent tax treaties. These Modified LOB Provisions are a variation and expansion of similar provisions contained in some of Canada’s tax treaties with other countries and paragraph 21.4 of the Commentary.

Given the proximity of the Government’s judicial setbacks and the introduction of the Modified LOB Provisions, it is reasonable to infer that the provisions were added in response to the decisions in Prévost and Velcro. Three recent tax treaties signed in 2012 all contained variations of the Modified LOB Provisions.

Articles 10 to 12 of the HK Treaty contain versions of the Modified LOB Provisions that would deny the reduced withholding rates when one of the main purposes of actions or transactions relating to a dividend, interest or royalty payment is to obtain treaty benefits. 

For example, Article 10(7) of the HK Treaty states that:

A resident of a Party shall not be entitled to any benefits provided under this Article in respect of a dividend if one of the main purposes of any person concerned with an assignment or transfer of the dividend, or with the creation, assignment, acquisition or transfer of the shares or other rights in respect of which the dividend is paid, or with the establishment, acquisition or maintenance of the person that is the beneficial owner of the dividend, is for that resident to obtain the benefits of this Article.

Similar provisions are also included in Articles 10 to 12 in Canada’s tax treaties with New Zealand (“NZ Treaty”) and Poland (“Poland Treaty”), both of which were also signed in 2012. However, the provisions in the Poland Treaty and the NZ Treaty are less broad than those in the HK Treaty. The emergence of the Modified LOB Provisions may indicate a deliberate change to Canada’s tax treaty model that would impact Canada’s future bilateral tax treaties.

The Modified LOB Provisions in the HK Treaty do not grant tax authorities any discretion on whether to apply the provisions. In contrast, the corresponding provisions in the NZ Treaty include language that obligates consultations between the respective competent authorities before the Modified LOB Provisions are applied to deny treaty benefits under Articles 10, 11 or 12. This competent authority mechanism in the NZ Treaty should offer taxpayers a measure of comfort as it prevents an auditor from simply denying treaty benefits, and raising an adjustment without any further consultation with the relevant competent authority. Nonetheless, the inclusion of the consultation requirement is not the ideal solution to the primary problem created by the broad language and reach of the Modified LOB Provisions. Taxpayers will still be subject to uncertainty, particularly at the tax planning stage, and run the risk of being denied treaty benefits.

Prior to 2012, these Modified LOB Provisions were seldom seen in Canada’s tax treaties. Where these provisions do appear in treaties signed prior to 2012, the language used is noticeably narrower and more targeted (“Pre-2012 Provisions”). The genesis of the Pre-2012 Provisions can likely be traced to paragraph 21.4 of the Commentary. As mentioned in the introductory  paragraph of this article, the OECD’s Commentary to Article 1 provided several examples of LOB provisions for countries to consider when drafting and negotiating bi-lateral tax treaties. Paragraph 21.4 of the Commentary states that:

“The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the [Article 10: “shares or other rights”; Article 11: “debt-claim”; Articles 12 and 21: “rights”] in respect of which the [Article 10: “dividend”; Article 11: “interest”; Articles 12 “royalties” and Article 21: “income”] is paid to take advantage of this Article by means of that creation or assignment.”


The latest expanded version of the Pre-2012 Provisions included in the treaties with Hong Kong and New Zealand is overly broad and is clearly intended to prevent many taxpayers from obtaining treaty benefits. The concern, however, is that the language is broad enough to encompass simple and inoffensive cross-border tax planning structures even in situations where the ultimate taxpayers are residents of the Contracting States or Parties. Moreover, one should be aware that the Modified LOB Provisions in the HK Treaty may even restrict corporate restructurings and transactions undertaken prior to the HK Treaty coming into force if these restructurings and transactions were undertaken in contemplation of obtaining treaty benefits from the HK Treaty.

While the analysis in the remainder of this article will focus solely on Article 10(7) of the HK Treaty dealing with dividends, the analysis is equally applicable to the articles dealing with interest and royalties in the HK Treaty and the Modified LOB Provisions in the NZ Treaty.

In reference to Article 10(7) of the HK Treaty, Article 10 will apply to a taxpayer if any one of the following three sets of actions occurs:

Action (1): There is an assignment or transfer of the dividend;

Action (2): There is a creation, assignment, acquisition or transfer of the shares or other rights from which the dividends arise; or

Action (3): There is an establishment, acquisition or maintenance of a person that is the beneficial owner of the dividend, (collectively, the “Actions”)

and one of the main purposes of any person undertaking any of the Actions is for the taxpayer to obtain the benefits of Article 10.

As currently worded, Article 10(7) may potentially be engaged whenever a taxpayer undertakes any form of action to obtain a reduced withholding tax rate on dividends under the HK Treaty regardless of whether the action may be considered abusive from a policy or GAAR11 perspective. One of the few situations where Article 10(7) will likely not apply is when a taxpayer already has an existing tax structure in place before the HK Treaty was signed. Moreover, Article 10(7) will not apply if none of the main purposes of the taxpayer in carrying out any one of the Actions was to take advantage of the benefits under the HK Treaty. However, the “main purpose” test may be of little comfort to taxpayers as corporate transactions and restructurings involving tax treaties are very often conducted for the purposes of tax planning and accessing treaty benefits.

In addition, the language of Article 10(7) does not appear to place any temporal restrictions on its application. Article 10(7) arguably applies when a taxpayer undertakes any of the Actions and one of the main purposes of the taxpayer was to take advantage of the benefits afforded by the HK Treaty. Therefore, there is a risk that even actions taken before the HK Treaty comes into force in contemplation of future treaty benefits could potentially be considered to trigger the application of Article 10(7).

Scenarios to Consider

The broad scope of Article 10(7) is best illustrated by way of the following scenarios which encompass some common corporate structures and transactions. In each scenario, assume that one of the main purposes of the transactions is for the taxpayer to take advantage of the benefits under Article 10, and that the person who holds the shares is the beneficial owner of the dividends.

Scenario 1

Assume that the HK Treaty is currently in force. Taxpayer A, an individual who is a resident of Hong Kong, wishes to purchase more than 10% of the outstanding shares of a Canadian company (“Canco”). Desiring to access the reduced 5% withholding tax rates under Article 10(2)(a) of the HK Treaty, Taxpayer A creates a new holding company (“New Holdco”) in Hong Kong to purchase the shares in Canco. Taxpayer A acknowledges that New Holdco serves no purpose other than to hold shares of Canco in order to obtain the reduced 5% withholding tax rate.

Article 10(7) may be interpreted in a manner that would appear to prevent Taxpayer A from establishing and utilizing the New Holdco to take advantage of the 5% withholding tax rate in Article 10(2)(a) of the HK Treaty. Taxpayer A arguably runs afoul of Action (3) by establishing New Holdco to purchase shares of Canco to obtain the reduced 5% withholding tax rate. 

Had Taxpayer A acquired the shares of Canco directly, Taxpayer A would have been subjected to a 15% withholding tax rate under Article 10(2)(b). Article 10(7) should not deny treaty benefits on a direct purchase of Canco’s shares by Taxpayer A as all of the main purposes of a direct purchase of shares in Canco are for commercial or investment purposes. 

Based on a literal interpretation of Article 10(7), by establishing New Holdco to acquire shares of Canco, New Holdco may be prevented from enjoying any of the benefits of Article 10. In other words, if Article 10(7) is applicable, New Holdco would be subject to the default 25% withholding tax rate under section 212 of the Income Tax Act (Canada) (“Act”). This is an absurd, and presumably unintended, result. It is very likely that CRA would not interpret and apply Article 10(7) to deny treaty benefits to New Holdco in this scenario. A potential argument CRA could use is that Article 10(7) is not intended to apply to transactions aimed at getting the lower tiered withholding tax rate within Article 10. However, until CRA offers further guidance or clarification, a plain and literal reading of Article 10(7) seems to indicate that New Holdco would be denied all of the treaty benefits under Article 10 in Scenario 1.

Scenario 2

Assume that the HK Treaty is not yet in force. Taxpayer A is an individual who is a resident of Hong Kong, and directly owns more than 10% of the outstanding shares of Canco. For simplicity, assume that there is no unpaid retained earnings (“RE”) in Canco, and the shares of Canco are not taxable Canadian property (“TCP”). Wishing to reduce the withholding rate from 15% to 5% for when Canco pays a dividend in the future, Taxpayer A establishes a holding company in Hong Kong (“New Holdco”), and transfers or assigns Canco shares to New Holdco before the HK Treaty comes into force.

As in Scenario 1, the broad language in Article 10(7) may potentially apply to the detriment of Taxpayer A and New Holdco when utilizing this simple tax planning structure. In Scenario 2, Actions (2) and (3) are potentially relevant. Taxpayer A established New Holdco and transferred the shares of Canco from which future dividends would arise.

As in Scenario 1, from a policy perspective, there is no apparent reason to deny New Holdco treaty benefits in Scenario 2. Taxpayer A and New Holdco are residents of Hong Kong and should be allowed to benefit from the HK Treaty. Taxpayer A’s actions in Scenarios 1 and 2 are strictly prospective tax planning in anticipation of future profits and dividends.

Denying treaty benefits to Taxpayer A in Scenarios 1 and 2 would arguably be contrary to the true intentions of the negotiators of the HK Treaty. As stated by the court in Gladden Estate v. Minister of National Revenue,12 “[c]ontrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view of implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned.”13 It may be argued that Article 10(7) should only apply to deny treaty benefits if Taxpayer A was engaged in treaty shopping and was not a resident of Hong Kong. Alternatively, it may also be argued that Taxpayer A, by directly holding shares of Canco, already has access to one of the benefits in Article 10. As a direct shareholder, Taxpayer A would benefit from the 15% withholding rate. Establishing New Holdco in Scenario 1 to buy shares of Canco, and establishing New Holdco and transferring shares in Canco to New Holdco in Scenario 2, merely allows Taxpayer A to access a different benefit under Article 10. 

Nevertheless, with respect to Article 10, the true intentions of the negotiators of the HK Treaty are currently unknown to the public. Based on a plain and literal reading, it is not immediately evident that Article 10(7) would not apply. Article 10(7) simply applies when “one of the main purposes of any person” in undertaking certain specified actions is to allow a taxpayer “to obtain the benefits of [Article 10].” While a purposive approach to treaty interpretation may provide a basis for CRA to not apply Article 10(7) in Scenarios 1 and 2, until CRA provides more guidance and information on this issue, Article 10(7) creates uncertainty and risk in tax structures that have hitherto been considered simple and uncontroversial.

Scenario 3

Assume the same facts from Scenario 2 except that Canco has significant unpaid RE that were accumulated prior to the date in which the HK Treaty was signed. 

Similar to Scenario 2, Article 10(7) would appear to apply to deny New Holdco all treaty benefits from Article 10. In contrast to Scenarios 1 or 2, some factions within CRA may find that Scenario 3 is arguably more offensive from a policy perspective given the unpaid RE. Nevertheless, the language of Article 10(7) does not appear to allow CRA to discriminate between Scenarios 2 and 3. Article 10(7) is arguably indifferent as to whether there is any unpaid RE in Canco. Therefore, if CRA takes the position that Article 10(7) does not apply in Scenario 2, then Article 10(7) should also not apply in Scenario 3. Nevertheless, until CRA articulates its administrative position, taxpayers are faced with significant tax planning risks.

Scenario 4

Assume that Taxpayer A, an individual resident in Hong Kong, owns more than 10% of the shares in Canco through a holding company in the Cayman Islands (“Cayco”). The Cayman Islands do not have a tax treaty with Canada and any dividends paid to Cayco from Canco are subject to a withholding rate of 25%. This structure was in place prior to the signing of the HK Treaty. In contemplation of the HK Treaty coming into force, Taxpayer A creates a new holding company in Hong Kong (“New Holdco”) and effects a transfer of Canco’s shares from Cayco to New Holdco with the purpose of obtaining the 5% withholding rate under Article 10(2)(a). Also assume that the shares of Canco are not TCP and that Canco has no unpaid RE.

In this scenario, like Scenario 2, Actions (2) and (3) are potentially relevant. Generally, most strategies to shift ownership of the shares in Canco to an entity in Hong Kong to obtain reduced withholding tax rates under Article 10 would appear to be captured by Article 10(7). Article 10(7) appears to prevent a seemingly legitimate form of tax planning when new tax treaties are introduced and residents of those Contracting States or Parties have existing structures.

From a policy perspective, it is difficult to make an argument that Taxpayer A or Cayco are engaging in treaty abuse by transferring the Canco shares from Cayco to New Holdco. With respect to treaty interpretation, it is also difficult to distinguish this scenario from Scenarios 2 and 3. Each of these scenarios involves actions or transactions undertaken in a manner that takes advantage of the HK Treaty by a taxpayer who is the ultimate shareholder and a legitimate resident of Hong Kong, and should thus be entitled to take advantage of the HK Treaty. Therefore, if CRA is not offended by Scenarios 2 and 3, it should also not be offended by Scenario 4. Again, however, greater clarity and guidance from CRA is required with respect to whether Article 10(7) would apply to the transactions under this scenario.

Scenario 5

Assume the same facts from Scenario 4 except that Canco has significant unpaid RE that were accumulated prior to the date in which the HK Treaty was signed. 

As in Scenario 4, Article 10(7) would arguably apply to prevent New Holdco from taking advantage of any treaty benefits under Article 10. Moreover, due to the existence of the unpaid RE, certain factions of CRA may consider that Scenario 5 is more offensive14 from a policy perspective than Scenario 4, and may be more inclined to invoke Article 10(7). However, with respect to the application of Article 10(7), there does not appear to be an obvious basis for CRA to distinguish between Scenarios 4 and 5 based on the presence or absence of unpaid RE. Even a purposive approach to interpreting the HK Treaty does not appear to allow CRA to make a distinction between Scenarios 4 and 5. Regardless, the uncertainty generated by Article 10(7) will persist until CRA provides more guidance.

Scenario 6

In this final scenario, assume the same facts from Scenario 5 except that the shares of Canco are TCP, and have appreciated in value. Also assume that Cayco can migrate to Hong Kong in a manner that it will be considered a resident of Hong Kong immediately following the migration, and the migration will not cause the shares of Canco to be disposed for Canadian tax purposes.

Whether migration is achieved by way of continuance or change in the location of central management and control, interpretive issues may arise regarding whether these strategies are caught under Action (3) (e.g., does the migration result in “the establishment, acquisition or maintenance of the person that is the beneficial owner of the dividend”). In the authors’ opinion, a migration of Cayco to Hong Kong would not constitute an event described in Action (3), however, the issue is not clear from doubt. Therefore, if CRA were to take a broad interpretation of Action (3) in order to protect itself from more offensive tax restructuring strategies (e.g., where the ultimate shareholders are not residents of Hong Kong and other LOB provisions are not adequate to deny the treaty benefit), how would they distinguish Scenario 6 from the other scenarios described herein? Again, there is anecdotal evidence that some fractions of CRA may find Scenario 6 offensive in treaty policy terms.

Concluding Remarks

The Modified LOB Provisions in the HK Treaty do not afford any discretion to the tax authorities in either Hong Kong or Canada. While the Modified LOB Provisions in the NZ Treaty do include a consultation requirement between competent authorities before the denial of treaty benefits, this is not an ideal solution for taxpayers and their advisors who require certainty in matters relating to tax planning. In light of the significant investments in Canada by residents of Hong Kong and the large volume of mainland Chinese outbound investments that are commonly structured through Hong Kong, the uncertainty and lack of CRA guidance concerning new LOB provisions in the HK Treaty may have a significant negative impact. Consequently, guidance from the CRA on these Modified LOB Provisions is greatly needed before taxpayers begin restructuring to take advantage of the HK Treaty.

Presumably, CRA may eventually restrict the application of the Modified LOB Provisions by offering guidance and interpretations with respect to when CRA would apply these provisions to deny treaty benefits relating to dividends, interest or royalties. However, in doing so, CRA would likely want to preserve its ability to utilize the Modified LOB Provisions to challenge offensive tax structures or transactions while ensuring that the application of the Modified LOB Provisions are sufficiently restricted such that legitimate and inoffensive structures or transactions are not inadvertently subject to the strictures of the Modified LOB Provisions. However, with respect to the broadly worded Modified LOB Provisions in Canada’s tax treaties with Hong Kong and New Zealand, CRA may have a difficult task in trying to achieve this balance.

Overall, the inclusion of the Modified LOB Provisions as currently worded in the HK Treaty and NZ Treaty is an unfortunate development that would potentially restrict legitimate cross-border tax planning and investments. At the very least, these provisions unnecessarily inject a significant degree of risk and uncertainty in the tax planning process. However, as mentioned in the opening paragraphs to this article, the Government’s recent announcement regarding a public consultation paper on treaty shopping appears to present an opportunity to reconsider whether the Modified LOB Provisions are an appropriate solution to combat certain elements of treaty shopping. Even though it pains the authors to say it, perhaps the comprehensive LOB Article approach taken in the Canada-U.S. Treaty is a direction the Government should consider as part of its future treaty policy rather than several specific anti-avoidance treaty provisions such as the Modified LOB Provisions. The Canada-U.S. Treaty approach, regardless of its complexity, appears to give taxpayers more certainty in their tax planning. It also provides taxpayers who are denied treaty benefits because of a particular provision in the LOB Article an opportunity to apply to the relevant competent authorities to grant treaty benefits in spite of the LOB Article where the structure is not offensive in treaty shopping terms.15

1. Refer to paragraphs 7 to 26 of the Organisation for Economic Co-operation and Development’s (“OECD”) Commentary to Article 1 of the OECD’s Model Tax Convention (the “Commentary”) for a detailed description of the many types of LOB provisions commonly found in the international tax community, including Canada’s tax treaty network.
2. Paragraph 10 of the Commentary to Article 1.
3. Paragraph 13 of the Commentary to Article 1.
4. See Article XXIX A - Limitation on Benefits of Canada-U.S. Treaty.
5. Paragraph 9.5 of the Commentary to Article 1.
6. The HK Treaty was signed by the respective governments on November 11, 2012.  Assuming that both Canada and Hong Kong ratify the HK Treaty in 2013, the HK Treaty will come into force in Canada for any income year beginning on or after January 1, 2014, and will come into force in Hong Kong for any year of assessment beginning on or after April 1, 2014. 
7. 2009 FCA 57.
8. 2012 TCC 57.
9. Canada Revenue Agency Roundtable, May 2012 International Tax Seminar, International Fiscal Association (Canadian Branch).
10. For the remainder of this article, unless specifically stated otherwise, any references to LOB provisions will refer exclusively to the LOB provisions relating to source taxation of interest, dividends, and royalty payments.
11. Canada’s General Anti-Avoidance Rule.
12. 1 C.T.C. 163, 85 D.T.C. 5188 (Federal Court—Trial Division).
13. Ibid at para 14.
14. The authors of this article do not view the absence or presence of RE as a relevant factor in deciding whether a particular set of transactions or structure is abusive or offensive from a policy perspective.  On the contrary, when any two contracting states enter into a new tax treaty it is inevitable that certain corporations in the contracting states will have undistributed RE prior to the date on which the respective treaty comes into force and that non-resident shareholders of these corporations will derive treaty benefits.  However, despite the absence of any official CRA pronouncement, the authors have encountered anecdotal evidence that suggests that CRA may be more likely to challenge transactions that would allow a taxpayer to access treaty benefits and obtain lower withholding tax rates on dividends from corporations with accumulated RE that could or would be distributed after the relevant treaty comes into force.
15. See paragraph 6 of Article XXIX A of the Canada-U.S. Treaty.

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