This content is from: Canada

Canada: Canadian treaty shopping proposals compared to OECD recommendations

Sabrina Wong
Casey Richardson-Scott
Canada's 2014 Budget proposes a domestic anti-abuse rule to address treaty shopping (the Canadian Proposals). The proposed rule is designed to override Canada's tax treaties and deny a treaty benefit where one of the main purposes for undertaking a relevant transaction was to obtain the benefit. Our update in the March 2014 issue provides more details on the Canadian Proposals.

On March 14 2014, the OECD published for public consultation a draft discussion paper entitled BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (the OECD Proposals).

The OECD Proposals take a somewhat different approach to addressing treaty shopping. They first recommend that states amplify the existence of anti-abuse (including anti-treaty shopping) notions inherent in tax treaties through statements to this effect in a treaty's title and preamble.

In that context, the OECD favours a treaty-based, rather than a unilateral domestic, approach according to which states would include limitation on benefit (LOB) provisions and general anti-abuse rules in their tax treaties to deal with avoidance connected directly to a treaty. The OECD contrasts this type of avoidance with avoidance under a state's domestic law "using treaty benefits" for which domestic anti-avoidance solutions would at least in part be required. The OECD recommends that states consider the introduction of comprehensive LOB provisions similar to those currently included in the Canada-US Tax Convention. However, the OECD is concerned that including a derivative benefit clause may result in treaty benefits being granted in the case of base eroding payments and has invited comments on that situation.

In addition, the OECD recommends the inclusion of a general anti-abuse rule also based on determining whether one of the main purposes of an arrangement or transaction was to obtain a treaty benefit. It may be helpful to consider this recommendation in light of the OECD's more general view that treaties already host an implicit anti-abuse limitation. The recommended rule differs from the Canadian Proposals in a number of respects, notably in contemplating limitations implemented in tax treaties themselves, rather than a unilateral domestic rule. Also, unlike the Canadian Proposals which indicate that treaty benefits may be granted, in whole or in part, to the extent reasonable in the circumstances, the OECD specifically contemplates, in relation to the main purpose aspect of the proposed rule, that a treaty benefit should not be denied where granting the benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.

The Canadian Proposals expressed a desire not to affect ordinary commercial transactions. It remains to be seen how this can be done if the domestic anti-abuse rule applies even where the circumstances are not contrary to the object and purpose of the relevant treaty. The Canadian anti-abuse rule is expected to be released in the form of draft legislation later this year as action item 6 in the OECD's Action Plan on Base Erosion and Profit Shifting.

Sabrina Wong ( and Casey Richardson-Scott (
Blake, Cassels & Graydon
Tel: +1 416 863 2400

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