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New protocol to Canada-UK tax treaty could affect future tax disputes

Jeffrey Shafer and Ian Caines, of Blake, Cassels & Graydon, explain how the recent protocol to the Canada-UK tax treaty could induce a change in the way taxpayers approach disputes covering the two jurisdictions.

On July 21 2014, a protocol was signed to amend the Canada-United Kingdom Tax Convention. Among other changes, the protocol introduces new rules (similar to provisions of the Canada-US treaty) providing for binding arbitration in the context of the mutual agreement procedure (MAP) and a provision allowing for examinations to be conducted by tax authorities outside of their home jurisdictions. For taxpayers dealing with the Convention these changes may have a material impact on the conduct of their tax audits and disputes.

Mandatory arbitration

 Where it applies, the new arbitration provision will require a dispute to be submitted to arbitration if the competent authorities have not been able to reach an agreement on the dispute under the Convention’s MAP within three years (subject to certain exceptions, for example, where a decision on the case has already been rendered by a court). There is apparently no requirement for the affected taxpayer to request the arbitration procedure and the decision of the arbitrator is binding on the tax authorities provided it is not rejected by any affected taxpayer. The specific rules and procedures relating to arbitration are to be agreed between the two states in an exchange of notes and the arbitration rules will not come into force until that time.

There has been a significant increase in the use of MAPs under Canadian tax treaties in recent years, and for some categories of disputes the average time for resolution is approaching three years. We can expect the prospect of arbitration under the Convention to provide both states with incentive to resolve MAP cases before the lapse of three years. In this context, the new arbitration provision will provide taxpayers with greater certainty of receiving a definite and timely resolution under the Convention’s MAP.

Offshore audits

The amendments to the Convention also add a provision allowing tax authorities to interview an individual or examine a person’s books and records in the other country, provided that the authorities have the consent of the person subject to examination and subject to procedures to be agreed upon by the two states.

This provision is somewhat unusual for Canadian tax treaties, only being in force in the Canada-US tax treaty, but has been included in a number of Canada’s (generally more recent) tax information exchange agreements. Depending on one’s circumstances, this provision either may allow more efficient gathering of information to help resolve a dispute or may weaken a taxpayer’s ability to resist what appear to be onerous requests for foreign interviews.

Jeffrey Shafer ( is a partner; and
Ian Caines ( an associate of Blake, Cassels & Graydon, the principal Canadian correspondents on the Tax Disputes channel of

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