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Federal Tax - Witholding Tax. 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":[1] Canada imposes withholding tax on dividends Canadian corporations pay to non-residents. Although the statutory rate of withholding is 25%, Canada invariably reduces that rate through bilateral tax treaties it enters into with other countries. But the reduction is not the same for all treaties. For instance, provided that certain criteria are met, the withholding tax rate under the treaty between Canada and Barbados can be reduced to 15% while the rate under the treaty between Canada and Luxembourg can be reduced to 5%.
[2] In 2003, shortly before Husky Energy Inc. paid significant dividends, three of its shareholders, resident in Barbados, loaned their shares to related Luxembourg corporations under securities lending agreements. Husky paid the dividends to the Luxembourg corporations and the latter then returned the shares to the Barbados shareholders, along with the gross amount of the dividends. The question the Tax Court of Canada faced was whether the Luxembourg corporations were the beneficial owners of the dividends and so eligible for the 5% withholding rate provided for in Canada’s treaty with Luxembourg. The Tax Court concluded they were not: Husky Energy Inc. v. The King, 2023 TCC 167 (the Tax Court Decision). I agree and would dismiss the appeals.
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A. Legal Background
[4] Subsection 212(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) provides that every non-resident person shall pay an income tax of 25% on dividends paid by a Canadian resident corporation to the non-resident person. A tax treaty between Canada and another country may provide for a lower rate.
[5] For example, under Canada’s treaty with Barbados, when the beneficial owner of the dividend is a resident of Barbados, the rate of the Canadian tax is reduced to 15%: Article X(2) of the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, Can. T.S. 1980 No. 29 (enacted in Canada by the Canada-Barbados Income Tax Agreement Act, 1980, S.C. 1980-81-82-83, c. 44, Sch. IX) (Barbados Treaty).
[6] Similarly, under Canada’s treaty with Luxembourg, the rate is reduced to 5% when the beneficial owner of the dividend is a resident of Luxembourg that meets certain ownership or voting power thresholds: Article 10(2)(a) of 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, Can.T.S. 2000 No. 22 (enacted in Canada by the Income Tax Conventions Implementation Act, 1999, S.C. 2000, c. 11, Sch. IX) (Luxembourg Treaty).
[7] Where a treaty provides for a rate lower than the 25% rate in the Income Tax Act, the lower rate prevails: subsection 10(6) of the Income Tax Application Rules, R.S.C. 1985, c. 2 (5th Supp.).
[8] Subsection 215(1) of the Income Tax Act requires a corporation that pays a dividend to a non-resident person to withhold the tax payable and remit it to the Receiver General of Canada on the non-resident’s behalf. Thus, if a Canadian corporation pays a $100 dividend beneficially owned by a resident of Barbados, the Canadian corporation shall withhold and remit $15 to the Receiver General. If the beneficial owner of the dividend is a resident of Luxembourg that meets the other conditions in Article 10(2)(a) of the Luxembourg Treaty, the Canadian corporation must withhold and remit $5.
[9] Finally, subsection 215(6) of the Income Tax Act provides that if a Canadian corporation fails to withhold the proper amount, it is liable to pay, on behalf of the non-resident, the whole of the amount that should have been deducted and withheld.
[10] The relevant provisions of the Income Tax Act and treaties are reproduced in Appendix A to these reasons.
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[47] In Prévost Car, this Court agreed that the beneficial owner of dividends is the “person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received”: Prévost Car at para. 13; Prévost Car TCC at para. 100.
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