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Public International Law - Tax Treaties. Canada v. Hutchison Whampoa Luxembourg Holdings S.À R.L.
In Canada v. Hutchison Whampoa Luxembourg Holdings S.À R.L. (Fed CA, 2025) the Federal Court of Appeal dismissed merged appeals, these relating to the "withholding tax on dividends Canadian corporations pay to non-residents".
Here the court reviews some provisions of the Vienna Convention on the Law of Treaties, as it applies to the 'Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital':[76] The Vienna Convention requires courts to consider the true intention of the treaty parties when interpreting Article 10(2)(a) of the Luxembourg Treaty. The Supreme Court of Canada did so in Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 at paras. 37, 42–43, 50, 62, 66, 79–89 and Crown Forest Industries Ltd. v. Canada, 1995 CanLII 103 (SCC), [1995] 2 SCR 802 at paras. 22, 43–44. The Alta Energy findings are particularly relevant to the present matter.
[77] In Alta Energy¸ the majority of the Supreme Court found that Canada and Luxembourg intended that corporations acting as conduits could benefit from a provision of the Luxembourg Treaty dealing with the taxation of capital gains: Alta Energy at paras. 79–89. The majority contrasted this intention with the two countries’ intention regarding the taxation of certain other income, including dividends: through Article 10(2)(a), Luxembourg and Canada chose to reserve the benefits of the treaty to the ""“beneficial owner”"" of dividends. The majority highlighted that such a measure prevents ""“conduit corporations from taking advantage of [the benefit of a treaty provision] where their beneficial owners [are] residents of a third country”"": Alta Energy at para. 84.
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(b) The OECD Commentaries
[78] The context of the Luxembourg Treaty further supports Canada and Luxembourg’s intention regarding Article 10(2)(a) as identified by the Supreme Court in Alta Energy.
[79] Article 31(2)(b) of the Vienna Convention provides that the context of a treaty comprises instruments made by one or more parties in connection with the treaty. Such instruments include the OECD’s Model Tax Convention on Income and on Capital, a model for the negotiation, interpretation and application of tax treaties, as well as its accompanying Commentaries and reports prepared by the OECD Committee on Fiscal Affairs: Crown Forest at paras. 54–55; Alta Energy at para. 38; Prévost Car at para. 10.
[80] The Luxembourg Treaty, based on the Model Convention, was signed in 1999. Accordingly, the Commentaries published prior to the signature of the Luxembourg Treaty, as well as the OECD report titled ""“Double Taxation Conventions and the Use of Conduit Companies”"" (OECD, International Tax Avoidance and Evasion: Four Related Studies, Issues in International Taxation no. 1 (Paris: OECD, 1987) (the ""“Conduit Report”""), are relevant to its interpretation: Prévost Car at paras. 8, 12. Consistent with the jurisprudence, the parties agree that the 2003 Commentaries on Article 10 elicit the views expressed in prior Commentaries and are, therefore, also relevant to the interpretation of the Luxembourg Treaty: Alta Energy at paras. 40–43; Prévost Car at para. 11. ....
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[84] Paragraphs 12 and 12.1 of the 2003 Commentaries on Article 10 explain that ""“[t]he term ‘beneficial owner’ is not used in a narrow technical sense, rather, it should be understood, [namely,] in light of the object and purposes of the [treaty], including avoiding double taxation and the prevention of fiscal evasion and avoidance.”"" The Commentaries further explain that if an agent or nominee receives a dividend on behalf of someone else, it would be inconsistent with the purpose of a tax treaty for the source country (i.e. the country of residence of the corporation paying the dividend—here, Canada) to apply the lower treaty rate. The reason is that the country of residence of the agent or nominee would not treat them as the owner of the dividend and, therefore, would not tax them. In other words, a country should not limit its taxing power when there is no risk of double taxation: OECD, Model Tax Convention on Income and on Capital, condensed version (Paris: OECD, January 2003), Commentary on Article 10.
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[87] Since Luxembourg does not consider the Luxcos to be the economic owners of the Dividends and therefore does not tax them, the 2003 Commentaries support a conclusion that it would run counter to the purposes of the Luxembourg Treaty for Canada to treat the Luxcos as the beneficial owners of the Dividends.
[88] This conclusion is in line with the Supreme Court of Canada’s teachings in Crown Forest which concerned Canada’s tax treaty with the United States: Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, Can.T.S. 1984 No. 15 (enacted in law in Canada by the Canada‑United States Tax Convention Act, 1984, S.C. 1984, c. 20, Sch. I) (US Treaty). In Crown Forest, the Supreme Court had to determine whether Norsk, a corporation incorporated in the Bahamas, was a resident of the United States under Article IV(1) of the US Treaty. Under that article, a resident of the United States included a person liable to tax in the United States ""“by reason of [its] domicile, residence, place of management, place of incorporation or any other criterion of a similar nature”"". If Norsk were resident of the United States, it would have been entitled to the treaty’s reduced rate of withholding tax in respect of rental income it earned in Canada.
[89] The Supreme Court held that Norsk was not a resident of the United States under Article IV(1) of the US Treaty because none of the criteria listed in Article IV(1) made it liable to comprehensive taxation in the United States: Crown Forest at paras. 34–36, 40, 68(1)(2). Rather, Norsk’s tax liability in the United States was limited to its income from a trade or business in the United States: Crown Forest at para. 28. Moreover, by virtue of agreement with the Bahamas, the United States exempted Norsk’s rental income from taxation: Crown Forest at para. 49. This situation led the Supreme Court to underscore, in obiter, that there was no need to prevent double taxation: Crown Forest at para. 48. Writing for the majority, Iacobucci J. said:Allowing Norsk to benefit from the Convention in this case would actually lead to the avoidance of tax on the rental income because the liability for tax asserted by the Canadian authorities would be reduced notwithstanding that the United States chooses not to impose any tax thereon or does not even have the jurisdiction therefor.
The goal of the Convention is not to permit companies incorporated in a third party country (the Bahamas) to benefit from a reduced tax liability on source income merely by virtue of dealing with a Canadian company through an office situated in the United States.
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“Treaty shopping” might be encouraged in which enterprises could route their income through particular states in order to avail themselves of benefits that were designed to be given only to residents of the contracting states. This result would be patently contrary to the basis on which Canada ceded its jurisdiction to tax as the source country, namely that the U.S. as the resident country would tax the income.
[Crown Forest at paras. 48–49, 52] [90] The 2003 Commentaries provide that it would be equally inconsistent with the object and purpose of the Luxembourg Treaty for Canada to grant relief or an exemption when income is paid to a resident of a treaty country ""“who simply acts as a conduit for another person who in fact receives the benefit of the income concerned.”"" Thus, the Commentaries endorse the Conduit Report’s assertion that ""“a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties”"": 2003 Commentaries on Article 10 at para 12.1 (emphasis added) citing para. 14b) of the Conduit Report.
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[97] Although not binding on Canadian courts, international jurisprudence may assist in interpreting tax treaties: Crown Forest at para. 54; David A. Ward, ""“Use of Foreign Court Decisions in Interpreting Tax Treaties”"" in Courts and Tax Treaty Law, 161–187 at 179–180. In this regard, a decision of the Swiss Federal Supreme Court is of interest: 2C_209/2017 (Switzerland, Federal Tribunal).
[98] Like the present matter, the Swiss case involved a securities lending agreement. The agreement was between a financial institution resident in the United Kingdom (UK Bank) and an affiliated financial institution resident in Luxembourg (Lux Bank). Under the agreement, UK Bank lent shares of a Swiss resident corporation (SwissCo shares) to Lux Bank, and Lux Bank undertook to pay compensation to UK Bank equal to the dividends paid on the SwissCo shares during the borrowing period.
[99] The Swiss case differs from the present matter in two respects: (a) as the agreement required, Lux Bank provided cash collateral in an amount corresponding to the value of the borrowed SwissCo shares, and (b) the UK Bank earned substantial interest on the collateral. Nevertheless, the Swiss tax authorities denied the lower rate of withholding tax on the dividends paid on the SwissCo shares provided for in the treaty between Switzerland and Luxembourg.
[100] The Federal Supreme Court referred to its own jurisprudence that the recipient of a dividend who has a contractual or legal obligation to forward said dividend to another person is not the beneficial owner. The Federal Supreme Court agreed with the lower court that Lux Bank had such an obligation and that there was never an intention to transfer the SwissCo shares to a third party as provided in the securities lending agreement. In fact, selling the shares would have been incompatible with the implied contractual obligation to pass-on the dividends. For these reasons, the Federal Supreme Court found that Lux Bank was not the beneficial owner of the dividends.
[101] Although the Swiss and Canadian approaches to the determination of beneficial ownership may differ, the Swiss decision demonstrates that the above analysis and its resulting outcome are not exceptional.
(d) Conclusion
[102] The interpretation of the Luxembourg Treaty in accordance with the applicable principles set forth in the Vienna Convention drives home the conclusion that the Luxcos were not the beneficial owners of the Dividends under Article 10(2)(a) of the Luxembourg Treaty. The same conclusion is arrived at when applying Prévost Car in light of the legal substance of the Securities Lending Agreements as the Luxcos cannot be said to have ""“receive[d] the [Dividends] for [their] own use and enjoyment and assume[d] the risk and control of the [Dividends they] received”"": Prévost Car at paras. 13–14. . Canada v. Alta Energy Luxembourg S.A.R.L.
In Canada v. Alta Energy Luxembourg S.A.R.L. (SCC, 2021) the Supreme Court of Canada reviewed treaty law, in the context of a tax treaty:(1) General Principles
[34] In R. v. Melford Developments Inc., 1982 CanLII 201 (SCC), [1982] 2 S.C.R. 504, at p. 513, this Court applied the principle that tax treaties do not themselves levy new taxes, they simply authorize the contracting parties to do so. Reciprocity is a fundamental principle underlying tax treaties, as they confer rights and impose obligations on each of the contracting states. Hogan J. observed that “[p]arties to a tax treaty are presumed to know the other country’s tax system when they negotiate a tax treaty; they are presumed to know the tax consequences of a tax treaty when they negotiate amendments to that treaty” (para. 84). This only makes sense.
[35] The objective of tax treaties, broadly stated, is to govern the interactions between national tax laws in order to facilitate cross-border trade and investment. One of the most important operational goals is the elimination of double taxation, where the same source of income is taxed by two or more states without any relief. If left unchecked, double taxation risks creating barriers to international trade and investment, which are vital in a globalized economy. Thus, many substantive provisions of the OECD Model Treaty, a model for numerous bilateral tax treaties, are directed to achieving this goal and resolving conflicting claims between residence-based taxation and source-based taxation.
[36] Another important consideration is the dual nature — contractual and statutory — of tax treaties. Consideration of the contractual element is crucial to the application of the GAAR because it focuses the analysis on whether the particular tax planning strategy is consistent with the compromises reached by the contracting states. As noted by international tax law scholars Jinyan Li and Arthur Cockfield:Whether the particular outcome of tax planning is defensible may depend on the understanding of the “bargain” struck by the two treaty partner countries. Every dispute involving the application of a tax treaty needs to ask the question of whether and how one treaty partner can dispute or should be allowed to upset the “bargain” struck in its own national interest that inheres in the treaty “contract”. Despite the offence that one treaty partner may take, in retrospect, to how a treaty provision is applied, the question remains: Might the particular outcome be one that the other treaty partner foresaw or reflect the “contractual intention” of the other treaty partner? After all, the “bargain” was entered into by the parties out of mutual self-interest. This is particularly relevant in applying general anti‑avoidance rules. [Emphasis added.]
(J. Li and A. Cockfield, with J. S. Wilkie, International Taxation in Canada: Principles and Practices (4th ed. 2018), at p. 376) [37] As tax treaties are treaties, their interpretation is governed by the Vienna Convention on the Law of Treaties, Can. T.S. 1980 No. 37 (“Vienna Convention”), but the methodology prescribed is not radically different from the modern principle applicable to domestic statutes in Canada — that is, one must consider the ordinary meaning of the text in its context and in light of its purpose (art. 31(1) of the Vienna Convention; Crown Forest Industries Ltd. v. Canada, 1995 CanLII 103 (SCC), [1995] 2 S.C.R. 802, at para. 43; Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536, at p. 578). However, unlike statutes, treaties must be interpreted “with a view to implementing the true intentions of the parties” (J. N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163 (F.C.T.D.), at p. 166, quoted approvingly in Crown Forest, at para. 43). The national self-interest of each contracting state must be reconciled in the interpretive process in order to give full effect to the bargain codified by the treaty. This principle applies with equal force where a court is engaged in the process of ascertaining a treaty’s “object, spirit, and purpose” as part of the GAAR framework.
(2) OECD Commentaries as Interpretative Aids
[38] Article 31 of the Vienna Convention permits courts to consider contextual factors such as other agreements and instruments made by parties in connection with a treaty. In my view, the OECD Model Treaty and its Commentaries are relevant to the interpretation of treaties based on that model. The introduction to the OECD Model Treaty indicates that the Commentaries “can . . . be of great assistance in the application and interpretation of the conventions and, in particular, in the settlement of any disputes”, and this Court has affirmed the “high persuasive value” of the OECD Model Treaty and its Commentaries (“Introduction” to the OECD Model Treaty (1998, 2003 and 2017), at para. 29; Crown Forest, at para. 55; see also D. A. Ward, “Principles To Be Applied in Interpreting Tax Treaties” (1977), 25 Can. Tax J. 263, at p. 268). However, the relevance of Commentaries released subsequent to the signing of a treaty is disputed (see, e.g., “Introduction” to the OECD Model Treaty (1998, 2003 and 2017), at para. 35; MIL (TCC), at para. 83; Cudd Pressure Control Inc. v. R., 1998 CanLII 8590 (FCA), [1999] 1 C.T.C. 1 (F.C.A.), at para. 28, per McDonald J.A.; SA Andritz, No. 233894, Conseil d’État (Section du Contentieux), December 30, 2003 (France); Li and Cockfield, at p. 57).
[39] In the instant case, the Minister relies on revisions to the Commentaries on the OECD Model Treaty that were published in 2003 and 2017, several years after Canada and Luxembourg negotiated the Treaty. In the 2003 Commentaries, treaty shopping is characterized as an abuse of the concept of residence, whereas previous Commentaries published at the time the Treaty was signed were silent on this question. A revision to the 2017 Commentaries, made in connection with the addition of a new art. 29 to the OECD Model Treaty, provides that legal residency alone is not an automatic entitlement to all benefits under a tax treaty.
[40] While revisions to the Commentaries are relevant to tax treaty interpretation, the key issue is the weight that they should receive. Although some scholars submit that the OECD has a tendency of revising the Commentaries too often and too dramatically, thereby sometimes diverging from the original intentions of the parties, I am not prepared to reject all subsequent Commentaries as interpretative aids (see Li and Cockfield, at p. 57; P. Malherbe, Elements of International Income Taxation (2015), at pp. 49-50). I instead prefer the nuanced approach adopted by the Federal Court of Appeal in Prévost Car Inc. v. Canada, 2009 FCA 57, [2010] 2 F.C.R. 65.
[41] Indeed, in Prévost Car, the Federal Court of Appeal held that subsequent Commentaries expanding or clarifying notions already captured by the OECD Model Treaty are relevant, but not those that extend the scope of provisions in a manner that could not have been considered by the drafters (paras. 10-12; see also Li and Cockfield, at p. 57). Thus, while later amendments to the Commentaries are not part of the context as defined in art. 31(2) of the Vienna Convention, given that such amendments were not made “in connexion with the conclusion of the treaty”, they may play a role under art. 31(3), which refers to “[a]ny subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions” and “[a]ny subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation”.
[42] In this case, I am of the view that the 2003 and 2017 Commentaries do not reflect the intentions of the drafters of the Treaty. The extensive revisions made to the Commentaries in 2003 purported to clarify the relationship between tax treaties and domestic anti-avoidance rules, and, in particular, one of the revisions was made to include the prevention of tax avoidance as a purpose of such treaties. The changes were not mere clarifications and have been described as being “created out of thin air by the OECD in 2003” and as “a significant change in the stated attitude of the OECD to the relationship between tax treaties and tax avoidance” (B. J. Arnold, “Tax Treaties and Tax Avoidance: The 2003 Revisions to the Commentary to the OECD Model” (2004), 58 I.B.F.D. Bulletin 244, at pp. 249 and 260).
[43] Using the Federal Court of Appeal’s language in Prévost Car (at para. 12), the 2003 Commentaries do not elicit, but rather contradict, the views previously expressed. When Canada and Luxembourg signed the Treaty in 1999, the applicable Commentaries indicated that anti-abuse measures, to be effective, had to be included in a treaty (“Commentary on Article 1” of the 1998 OECD Model Treaty, at para. 21). Further, they referred to the principle of pacta sunt servanda, which supports the position that where nothing in a treaty speaks directly to fiscal avoidance, there is a strong argument that the treaty partners negotiated the treaty not intending such rules to apply (“Commentary on Article 1” of the 1998 OECD Model Treaty, at paras. 11‑26; D. A. Ward et al., The Interpretation of Income Tax Treaties with Particular Reference to the Commentaries on the OECD Model (2005), at pp. 91‑92).
[44] Moreover, interpreting art. 1 of the Treaty with reference to the 2003 Commentaries would overlook Luxembourg’s registered observation on the “Commentary on Article 1” of the 2003 OECD Model Treaty. That observation reads as follows:Luxembourg does not share the interpretation in paragraphs 9.2, 22.1 and 23 which provide that there is generally no conflict between anti-abuse provisions of the domestic law of a Contracting State and the provisions of its tax conventions. Absent an express provision in the Convention, Luxembourg therefore believes that a State can only apply its domestic anti-abuse provisions in specific cases after recourse to the mutual agreement procedure. [para. 27.6] In effect, even if the Minister were able to rely on the Commentaries postdating the Treaty, they would be of no assistance because Luxembourg’s observation expresses disagreement with the “Commentary on Article 1” of the OECD Model Treaty, which includes the anti-abuse commentary (Ward et al., at p. 64; “Commentary on Article 1” of the 2003 OECD Model Treaty, at p. 7).
[45] It follows, then, that in the interpretation of art. 1 of the Treaty, Commentaries on art. 1 of the OECD Model Treaty that postdate the Treaty cannot be relied on to introduce terms that modify the Treaty. Not only would this effectively amend the Treaty in a manner not agreed upon by the parties, but it would also usurp the role of the Governor in Council by allowing for judicial amendment of bilateral treaties against the expressed wishes of the contracting states. The court continues with a useful and illustrative examination of the Luxembourg-Canada tax treaty from para 52 on.
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