Canada: Canada signs protocol to amend Canada-UK tax treaty

Bryan Bailey		Josh Jones

On July 21 2014, Canada and the UK entered into a protocol to amend the Canada-UK tax treaty. The protocol generally eliminates Canada's ability to impose withholding tax on interest paid to a UK resident person dealing at arm's-length with the payer. This parallels recent changes in Canadian domestic law which generally eliminated withholding tax on arm's-length interest payments. Payments of participating interest and payments of interest to non-arm's length persons are generally subject to withholding tax under Canadian domestic law and generally continue to not be exempt from Canadian withholding tax under the treaty.

The protocol also introduces new time limits relating to transfer pricing assessments and the mutual agreement procedure between Canada and the UK, as well as a new arbitration process to resolve double tax cases.

Of particular interest is what was not included in the protocol. Notably, no amendments were made to the capital gains article. Generally, gains realised by a non-resident of Canada from the sale of shares of a Canadian private company that derive their value primarily from Canadian real property may be subject to tax under Canadian domestic law. Under the treaty, such gains realised by a UK resident are not taxable in Canada unless the shares derive the greater part of their value from "immovable property" in Canada, which generally excludes property in which the company's business is carried on. The Canadian Department of Finance previously commented that the broad exclusion from "immovable property" was inconsistent with Canadian treaty policy, leading to expectations that a broader "immovable property" definition would be brought in.

Also, no treaty shopping provisions were included in the protocol. Canada has been considering a number of different ways to combat treaty shopping in the context of more broadly based international deliberations associated with the OECD's Base Erosion and Profit Shifting Action Plan. Most recently, Canada invited consultations on a domestic rule to deny treaty benefits otherwise available if "one of the main purposes" of a transaction was to obtain the benefit. The Treaty already contains a main purpose rule for dividends, interest and royalties, but not, for example, for business profits or capital gains.

The protocol must be ratified by Parliament in both countries. If ratification occurs in 2014, the protocol will generally enter into force January 1 2015 for withholding tax purposes, and, for income tax purposes, for tax years beginning after ratification.

Bryan Bailey (bryan.bailey@blakes.com)
Tel: +1 416 863 2297
Josh Jones (josh.jones@blakes.com)
Tel: +1 416 863 4278
Blake, Cassels & Graydon
Website: www.blakes.com

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