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Canada: Residence not a prohibited ground of treaty discrimination

A recent decision of Canada's Federal Court of Appeal considered the non-discrimination provision of the Canada-UK Tax Convention finding that it did not apply because the Canadian domestic legislation in question discriminated based on residency rather than nationality.

The Federal Court of Appeal confirmed that Canada is not prohibited under the treaty from discriminating against taxpayers based on their residency.

In Saipem UK Limited v The Queen, the taxpayer, a non-resident of Canada, claimed deductions in computing its taxable income for purposes of the Canadian Income Tax Act, from activities carried on by it in Canada through a permanent establishment (PE) within the meaning of the treaty. The deductions related to certain non-capital losses from business activities carried on in Canada by a corporation, SEI, that at all material times was related to the taxpayer within the meaning of the act and that was wound up into the taxpayer. The Minister of National Revenue denied the deductions on the basis that the Act required each of the taxpayer and SEI to be a Canadian corporation as defined in the act, and that definition required each corporation to be resident in Canada and either (i) incorporated in Canada, or (ii) resident in Canada throughout the period that began on June 18 1971.

Article 22(1) of the treaty prohibits discrimination on the basis of nationality, and the taxpayer asserted that the provision of the act restricting the deduction to Canadian corporations violated its rights as a UK national, and for purposes of the treaty, to non-discriminatory treatment guaranteed by Article 22. In early 2011, the Tax Court of Canada rejected the taxpayer's position.

Janette Pantry & Rebecca Levi

Blake, Cassels & Graydon

Tel: +1 416 863 2400

Fax: +1 416 863 2653


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