Canada's Tax Treaties by srn95060

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									Canada’s Tax Treaties
                                                      David A. Ward, QC*
P RÉCIS
Cet article se divise en trois parties. Dans la première, l’auteur traite
brièvement de l’évolution historique des conventions fiscales, y compris
les conventions fiscales modèles publiées initialement par le Comité fiscal
de la Société des Nations, dont le travail sur les conventions modèles a
débuté peu après la formation de la Société pour se poursuivre jusqu’en
1946 à la publication du modèle connu sous le nom de «Modèle de
Londres». La première convention fiscale complète du Canada a été
signée en 1942 avec les États-Unis. Après la fin de la Deuxième Guerre
mondiale, l’Organisation européenne de coopération économique a repris
le travail antérieurement effectué par le Comité fiscal de la Société des
Nations. Elle a préparé et publié, après que son nom ait été changé et que
l’organisation ait été reconstituée sous la dénomination d’Organisation de
coopération et de développement économiques (OCDE), le Modèle de
Convention de double imposition de 1963, ainsi que des commentaires.
Ce modèle et les commentaires ont été révisés en 1977. En 1992, le
Comité des affaires fiscales de l’OCDE a publié une convention modèle et
des commentaires sous forme de feuilles mobiles de sorte que des
révisions puissent y être apportées fréquemment, comme elles l’ont été
depuis 1992, et le seront vraisemblablement dans l’avenir.
    Les pays en voie de développement n’ont pas jugé que les modèles de
l’OCDE sont appropriés à leurs politiques fiscales puisque, selon eux,
l’OCDE met trop d’accent sur le droit de lever des impôts dans l’État de
résidence et qu’elle n’accorde pas suffisamment de marge de manoeuvre
aux États d’origine pour lever des impôts. Par conséquent, les Nations-
Unies ont publié leur convention modèle en 1984.
    Dans la deuxième partie de l’article, l’auteur discute dans quelle
mesure le Canada a suivi et dans quelle mesure il s’est éloigné des
modèles de l’OCDE et des Nations-Unies, selon le cas, dans le cadre de la
négociation de leurs conventions fiscales avec des pays développés et
des pays en voie de développement. Cette analyse est fondée sur un
examen des conventions fiscales récentes visant à établir, à partir des
tendances communes à ces conventions, à quoi doivent ressembler les
conventions modèles non publiées du Canada (une pour les pays
développés et une pour les pays en voie de développement). Cette
analyse est élaborée en examinant chaque article.


  * Of Davies Ward & Beck, Toronto.

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   Dans la troisième partie, l’auteur discute de l’évolution future possible
du texte des conventions fiscales. Il examine les renseignements
récemment publiés dans lesquels sont indiqués le travail futur du
Comité des affaires fiscales de l’OCDE et les modifications qui pourraient
être apportées au modèle, dont de nombreuses seront
vraisemblablement adoptées par le Canada en temps opportun. En plus
des études actuelles de l’OCDE, l’auteur propose d’autres points des
conventions qui pourraient être modifiés au Canada, surtout en
examinant certaines des dispositions contenues dans la convention
fiscale entre le Canada et les États-Unis, nombre de ces points visant à
traiter de certaines des dispositions uniques contenues dans la loi
canadienne de l’impôt sur le revenu. L’auteur suppose que certaines de
ces dispositions pourraient, en temps opportun, être utilisées à plus
grande échelle dans d’autres pays.

ABSTRACT
This paper is divided into three parts. In the first, the author deals briefly
with the historical development of tax treaties, including the model tax
treaties first published by the Fiscal Committee of the League of Nations,
whose work on model treaties commenced shortly after the league was
formed and continued until 1946 with the publication of what has been
known as the “London model.” Canada’s first comprehensive income tax
treaty was signed in 1942 with the United States. After the end of the
Second World War the Organisation for European Economic Co-operation
took up the work previously done by the Fiscal Committee of the League
of Nations and prepared and published, after its name was changed and
the organization was reconstituted as the Organisation for Economic
Co-operation and Development (OECD), the 1963 Draft Double Taxation
Convention, together with commentaries. This model and the
accompanying commentary were revised in 1977. In 1992, the Committee
on Fiscal Affairs of the OECD published a model convention and related
commentary in looseleaf form so that revisions could be made frequently,
as they have been since 1992, and presumably will continue to be.
   Developing countries have not found that the OECD models are
suitable to their tax policies, as, from their perspective, the OECD
overemphasizes the right to tax in the state of residence and does not
give enough room to the state of source to impose taxation. This led to
the publication by the United Nations of its model treaty in 1984.
   In the second part of the paper, the author discusses the extent to
which Canada has followed and the extent to which it has departed from
the OECD model or the United Nations model, as the case may be, in
negotiating its tax treaties with developed and developing nations. This
analysis is based on a review of recent tax treaties in an attempt to
discern from common patterns in those treaties what Canada’s own
unpublished model treaties (one for developed countries and one for
developing countries) must look like. The analysis proceeds on an
article-by-article basis.

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   In the third part of the paper, the author discusses possible future
developments in the text of tax treaties. He reviews recently released
information indicating the future work of the Committee on Fiscal Affairs
of the OECD and possible changes to the model, many of which Canada
will presumably adopt in due course. Apart from the current studies of
the OECD, the author postulates other areas of future treaty developments
in Canada, principally by looking at some of the provisions in the
Canada-US income tax convention, many of which have been designed to
deal with some of the unique provisions of Canadian income tax law. The
author speculates that some of these provisions may in due course have
more widespread use in other countries.


INTRODUCTION
In this paper I deal briefly with historical development of the various
international model income tax conventions and of Canada’s own tax
treaty network. I then review, in some detail, Canada’s current tax treaty
negotiating positions and attempt to reconstruct the models or policies
(which have never been published) from which our treaty negotiators
apparently work. Finally, I speculate on possible future tax treaty devel-
opments, both with respect to the international model treaties and Canada’s
own models and policies. The principal guideposts for this forecast are
recent statements made by the Organisation for Economic Co-operation
and Development (OECD ) and some of the articles of the Canada-US tax
convention, not found in other treaties, that have obviously been tailored
to deal with particular provisions of the Income Tax Act. I should also
state what this paper does not deal with. It does not deal with the fasci-
nating subject of tax treaty interpretation. Therefore, it does not deal with
questions of the relevancy and weight of the commentary to the various
OECD and UN models, or with the relevancy and weight of the various
OECD publications on specific tax treaty subject matter. It does not at-
tempt to deal with the growing Canadian or international jurisprudence
on tax treaty interpretation and on the application of provisions of tax
treaties in the light of internal tax law. Finally, it does not attempt to deal
more than fleetingly with any of Canada’s treaties, each of which is unique
in its own right, all of them having been produced as a result of bilateral
negotiations.

THE HISTORICAL PERSPECTIVE
Early History
The development of model income tax treaties began on October 17,
1922, when the secretary general of the League of Nations asked a number
of European countries to indicate whether they would be prepared to
nominate a technical official to sit on a committee to be formed to study
questions of double taxation and tax evasion, suggesting that better re-
sults for a solution to the problems “might be anticipated if a meeting of
these representatives were convened in order to discuss the possibility of

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an agreement to enable common action to be taken upon certain points,
and to permit the drawing up of schemes, bilateral agreements and other
agreements concerning double taxation and the evasion of taxation.”1 Seven
countries responded—Belgium, Czechoslovakia, France, Great Britain,
Italy,2 the Netherlands, and Switzerland. This group of government tech-
nical experts was subsequently named the Fiscal Committee of the League
of Nations, and was later enlarged to 10 regular members with the addi-
tion of Bolivia, Greece, Spain, and the United States (although not a
member of the League of Nations) and the relegation of Czechoslovakia
to the status of a corresponding member. By 1934, there were 36 corre-
sponding members, of which Canada was one. 3 Corresponding members
were principal officials of the tax administrations of the countries they
represented. They served, however, in their private capacity. Mr. C. Fraser
Elliott of the Canadian Department of National Revenue represented
Canada. The committee met approximately 12 times prior to the Second
World War and reported on its deliberations to the Financial Committee
of the League of Nations. Although a large number of countries were
represented by full or correspondent membership on the Fiscal Commit-
tee, its meetings seem to have been attended by small groups: where
records indicate those who attended the meetings, they show only 7 to 11
members attending. The Fiscal Committee produced the first texts of draft
model conventions with its report of October 1928.4 In subsequent meet-
ings the texts were further refined, but, in comparison with the current
OECD model income tax convention, could fairly be described as some-
what rudimentary and a bit crude.

Canada’s Early Participation
Canada’s participation in this early League of Nations activity, as recorded
in the papers, seems to have been fairly late. The records indicate that
Canada, along with 22 other countries and 3 states of the United States,
submitted a report to the late Dr. Mitchell B. Carroll (who later became a
long-term president of the International Fiscal Association). The report
was used in the preparation of his monumental study5 for the committee
on the apportionment of profits of corporations among their permanent
establishments, which was submitted to the Fiscal Committee at its meeting


    1 The League of Nations reports dealing with these early activities have been repub-
lished in United States: Staff of the Joint Committee on Internal Revenue Taxation,
Legislative History of United States Tax Conventions, vol. 4, Model Tax Conventions
(Washington, DC: US Government Printing Office, 1962) (herein referred to as “LHUSTC”).
The statement is found at 4061.
    2 Italy left the committee and the League of Nations in 1935.
    3 Mitchell B. Carroll, “Allocation of Business Income: The Draft Convention of the
League of Nations” (March 1934), 34 Columbia Law Review 473-94.
    4 LHUSTC, at 4155.
    5 Mitchell B. Carroll, Taxation of Foreign and National Enterprises, vol. 4, Methods of
Allocating Taxable Income (Geneva: League of Nations, 1933).

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on June 26, 1933.6 The first recorded attendance by a representative of
Canada at these early meetings of the League of Nations Fiscal Commit-
tee was that of Mr. C. Fraser Elliott, who attended the meeting in Geneva
on October 16, 1937 as a corresponding member of the committee.7 The
records do not indicate any further attendance of a Canadian representa-
tive prior to the Second World War. During the war, some of the members
of the Fiscal Committee met and drafted a new model convention in the
course of meetings held at The Hague in April 1940 and in Mexico City
in June 1940 and July 1943 (which became known as the “Mexico
model”).8 There was dissatisfaction after the war with the Mexico model
because, like the later United Nations (UN) model, it favoured taxation at
source rather than taxation at residence, reflecting the fact that the par-
ticipants in the Mexico drafting sessions were representative more of the
developing countries than the developed countries, most of which were
occupied or were themselves engaged in war and unable to participate in
these sessions. The Fiscal Committee of the League of Nations again met
in London in March 1946 (with Mr. C. Fraser Elliott as a full member of
the committee) and made some changes to the Mexico model, principally
restoring the emphasis on taxation in the country of residence rather than
taxation of source, producing a model that became known as the “London
model.”9 This, of course, took place one year after the birth of the Cana-
dian Tax Foundation.

Canada’s Early Income Tax Treaties
In comparison with the number of income tax conventions in existence at
present, at the time of the birth of the Canadian Tax Foundation there
were very few. Canada had only one comprehensive income tax treaty,
namely, its reciprocal tax convention with the United States, which was
signed in March 1942 and remained in force until 1984. In addition, prior
to the 1942 convention with the United States, Canada had entered into
some limited international agreements in relation to taxes. One was by an
exchange of notes with the Netherlands Antilles. Another was by the
exchange of instruments of ratification of a limited agreement made with
the United States in 1936 limiting the rate of tax on business profits and



   6 LHUSTC,      at 4241.
   7 Ibid.,  at 4265.
    8 Ibid., at 4305. The published League of Nations records do not specify which mem-
bers of the committee participated in these sessions. However, Mitchell B. Carroll, in “The
New Tax Convention Between the United States and Canada” (August 1942), 20 Taxes:
The Tax Magazine 459, notes that officials from Argentina, Brazil, Mexico, Peru, Ven-
ezuela, Canada, and the United States attended the 1940 meeting in Mexico. In the
introduction to the United Nations Double Taxation Convention Between Developed and
Developing Countries, UN publication no. ST/ESA/102, it is said that Bolivia, Chile,
Colombia, Ecuador, Uruguay, and Venezuela also attended the meeting in Mexico City in
July 1943 at which the Mexico model was adopted.
    9 LHUSTC, at 4303.



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dividends. 10 A third was by agreement with the United Kingdom in Octo-
ber 1935 limiting taxes on profits on the cross-border sale of goods except
where the goods were sold from a stock in the other country or accrued
through a branch or management or agency in the other country. In addi-
tion, Canada had, in July 1943, entered into a reciprocal agreement con-
cerning taxes imposed on shipping companies enforceable as between
Canada and British Guyana. 11

The Post-War Work of the OEEC and the OECD
After the publication of the London model by the Fiscal Committee of the
League of Nations, the work of the league on model income tax treaties
seemed to have come to an end and was subsequently picked up by the
Fiscal Committee of the Organisation for European Economic Co-operation
( OEEC), which worked on a new model ultimately published as the 1963
Draft Double Taxation Convention on Income and Capital.12 The first
report of the work of the Fiscal Committee of the OEEC on this model
was published in 1958, and included draft articles concerning the taxes to
be covered by the model, the definition of a permanent establishment,
and the definition of fiscal domicile and tax discrimination on the grounds
of nationality or other similar grounds, together with commentary on the
draft articles.13 Subsequent reports with draft articles and commentary
were published in July 1959,14 in 1960,15 and in 1961. 16 The member
countries of the OEEC, together with Canada and the United States, signed
an agreement to set up a broader-based entity—the Organisation for Eco-
nomic Co-operation and Development—in December 1960 in a structure
in which the legal personality of the OEEC continued and which became
effective on September 30, 1961.17 Canada’s input into the OECD 1963

    10 This was terminated in 1941. There was also a limited agreement for the reciprocal
exemption of shipping profits between the United States and Canada in 1928, retroactive
to 1921, made by an exchange of diplomatic notes.
    11 See United Nations, Department of Economic Affairs, Fiscal Division, International
Tax Agreements (Lake Success, NY: United Nations, 1948).
    12 Organisation for Economic Co-operation and Development, Draft Double Taxation
Convention on Income and Capital (Paris: OECD, 1963).
    13 LHUSTC, at 4447. The importance of this work should not be understated. It re-
mains at the foundation of the subsequent OECD models and the UN model. The UN
model was published by the United Nations in 1984 after the UN Economic and Social
Council on August 4, 1967 asked the secretary general to set up an ad hoc working group
of experts and tax administrations from developed and developing countries to study a
means of developing tax treaties acceptable to both groups of countries. The experts were
appointed from Argentina, Brazil, Chile, France, Germany, Ghana, India, Israel, Japan,
Holland, Norway, Pakistan, the Philippines, Sri Lanka, the Sudan, Switzerland, Tunisia,
Turkey, the United Kingdom, and the United States. Canada seemingly did not participate
either directly or as an observer. See the introduction to the UN model, supra footnote 8.
    14 LHUSTC, at 4511.
    15 Ibid., at 4656.
    16 Ibid., at 4619.
    17 See the introduction to the OECD 1963 draft convention, supra footnote 12, at 7.



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draft model was therefore minimal, because most of the important work
on this model had predated the existence of the OECD. In fact, Canada
seems to have had difficulty in accepting some of the fundamental rules
set out in the 1963 draft model.18
   After Canada became a member of the OECD effective in 1961, Cana-
dian representatives actively participated in the Fiscal Committee of the
OECD (renamed the Committee on Fiscal Affairs of the OECD in 1971) and
its various working parties19 in drafting the 1977 OECD model treaty and
the current OECD model first released in 1992, which has been and will
continue to be amended periodically, and in dealing with other OECD fiscal
issues. The participation has extended not only to the models themselves,
but also to the commentary on the models and the preparation by the OECD
of its published and unpublished studies relating to the various models.

Canada’s Treaty Activity Between the Second World War
and 1972 Tax Reform
Between 1945 and 1972, Canada expanded its treaty network in a fairly
limited way, negotiating income tax treaties with 17 additional countries.
Of those treaties, 15 came into force—namely, those with the United King-
dom in 1946 (and a replacement treaty in 1967), New Zealand in 1947,
France in 1951, Sweden in 1951, West Germany in 1956, South Africa in
1956, the Netherlands in 1957, Australia in 1957, Finland in 1959, Japan
in 1964, Denmark in 1964, Ireland in 1966, Trinidad and Tobago in 1966,
Norway in 1966, and Jamaica in 1971. Treaties negotiated with Belgium
and Belgian Congo in 1958 were never proclaimed in force.

The Effect of 1972 Tax Reform
The limited pre-tax-reform Canadian network of treaties should be com-
pared with Canada’s tax treaty network today. At the time of writing,
Canada has signed 60 income tax conventions, of which 56 are in force.
Three—namely, those with Nigeria, Latvia, and Estonia—are awaiting
proclamation. The treaty with Liberia signed in November 1976 may, it
seems, never be proclaimed in force, as for years no action has been
taken to do so. The worldwide growth in the number of tax treaties gen-
erally is also impressive. Currently, there are over 225 treaties between


    18 R. Alan Short, “International Aspects—I,” in Report of Proceedings of the
Twenty-Second Tax Conference, 1970 Conference Report (Toronto: Canadian Tax Founda-
tion, 1971), 171-75, at 172.
    19 Working party 1 was set up in 1971; it deals with double taxation and related ques-
tions, and is therefore concerned with tax treaties. Working party 1 is broken down into
various working groups, one of which is the steering group on the revision of the model
tax conventions. Working party 2, also set up in 1971, is concerned with tax analysis and
statistics, of which there are two groups; one is concerned with foreign source income and
the other with revenue statistics. Working party 6, set up in 1973, is concerned with
taxation and multinational enterprises. Working party 8 is concerned with tax evasion and
avoidance. Working parties 3, 4, 5, and 7 were wound up prior to 1995 when their tasks
were completed.

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OECD member countries, and over 1,400 worldwide.20 The number of
treaties between OECD countries has grown from 85 as at March 1963.21
   Canada’s increased activity since 1971 in negotiating and bringing into
force this large number of tax treaties was stimulated by the tax reform
process, which began with the Carter commission and moved to the “rasp-
berry book” and then to a white paper, with implementing legislation
introduced in June 1971. Important changes to the Income Tax Act, which
came into force in 1972, depended in part for their fair operation on a
widespread tax treaty network. Included among these provisions are, of
course, the provisions taxing dividends received by Canadian corporations
from foreign affiliates where the distinction between dividends paid out
of exempt and taxable surplus is fundamental. Also important to the de-
velopment of a treaty network was the introduction of a tax on capital
gains that extended to tax non-residents of Canada on a large category of
property described in the Act as “taxable Canadian property,” which was,
and still is, a wide departure from the international norm. These aspects of
tax reform dictated an urgent need to expand Canada’s tax treaty network.
To encourage other countries to enter into tax treaties with Canada, in
1972 the withholding tax rate in the Income Tax Act on such things as
dividends, interest, and royalties was raised from the previous general rate
of 15 percent to a general rate of 25 percent. Canada was willing in treaty
negotiations to reduce the rate at least to the prior statutory rate. Canada
also was prepared to give up the capital gains tax on direct foreign invest-
ment in Canada through Canadian corporations and other entities, other
than those whose value is principally attributable to immovable property
situate in Canada. The expanding treaty network benefited Canadian-based
multinationals not only in respect of exempt surplus treatment of divi-
dends from foreign affiliates resident and carrying on business in treaty
countries, but also in respect of reduced foreign withholding taxes on divi-
dends, interest, royalties, etc. received from those countries.

CURRENT TAX TREATY PRACTICES
Canada’s Current Tax Treaties
Although Department of Finance officials have from time to time indi-
cated that Canada has its own model income tax convention, the model
has never been published. One presumes that, like the OECD model in-
come tax convention, the Canadian unpublished model is ambulatory, as
it seems to change from time to time. This model certainly is based on the
OECD model, but with notable departures. To try to reconstruct the model,
one must study the recent treaties and, by an educated guess, attempt to
determine through common patterns to what extent Canada’s unpublished
model does depart from the current OECD model treaty. Such a study
shows that, in dealing with less developed countries, special provisions

   20 See the mission statement of the Committee on Fiscal Affairs (agreed to at the June
1995 meeting.)
   21 See the OECD 1963 draft convention, supra footnote 12, at 23.



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are offered to treaty partners that are not included when Canada deals
with developed countries. It may be surmised, therefore, that Canada has
two unpublished model treaties—one for use in negotiations with devel-
oped countries, and one for less developed countries that adopts some of
the departures from the OECD model found in the UN model. Some of the
departures may be considered as improvements in drafting only, and some
of the departures are much more substantive. Some of the departures
represent policy positions, while others represent clarifications or im-
provements on the current OECD model.
   Because bilateral tax treaties are the product of negotiations with an-
other country, it is not always obvious in viewing the outcome of the
negotiations exactly what provisions were included in the treaty as a
result of Canada’s position rather than the position of the negotiating
partner. The discussion that follows, therefore, involves some judgment
calls in attempting to extract from Canada’s more recent treaties that
which probably represents its model treaty or negotiating position when
negotiating with developed countries on the one hand and negotiating
with developing countries on the other. The discussion will not refer in
detail to the provisions of the current OECD model except where Canada
departs from it. Discussion of the differences between the OECD model
and the UN model is limited generally to those provisions of the UN
model which are different from the OECD model and which Canada adopts
in dealing with developing countries.

Title and Preamble
In the 1963 draft OECD model, it was noted that the preamble to a con-
vention should be drafted in accordance with the constitutional procedure
of both contracting states. This note was repeated in the 1977 OECD
model, appears in the UN model that was published in 1984, and contin-
ues in the current (ambulatory) OECD model. Until the publication of the
current OECD model, the various models entitled the convention a con-
vention “for the avoidance of double taxation with respect to taxes on
income and capital.” This wording was dropped by the OECD in 1992. A
note in the current model states that countries wishing to do so may
follow the widespread practice of including in the title a reference either
to the avoidance of double taxation or to both the avoidance of double
taxation and the prevention of fiscal evasion. Canada’s practice is to
include in the title a reference to both the avoidance of double taxation
and the prevention of fiscal evasion. Canada also restates this purpose of
the treaty in the preamble, with the result that, unlike the notes contained
in the various OECD and UN models, the preamble is not in fact drafted in
accordance with constitutional procedure but rather merely repeats the
wording of the title.
   It is questionable whether, from a Canadian perspective, the main pur-
pose of a tax treaty can properly be said to be for the avoidance of double
taxation. Whereas the various model treaties contain in article 23 impor-
tant provisions which, by way of tax credit or exemption, relieve against

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double taxation, Canada (as is the case with most other countries) never
follows the model conventions in this respect and always relieves against
double taxation under internal law by preserving and limiting the tax
credits and exemptions in treaties to the foreign tax credits provided un-
der the Income Tax Act and the exemption in the Act in respect of dividends
paid out of exempt surplus. If, as is often the case, the treaty partner
provides tax credits or exemptions also by its internal law, generally the
treaty will merely preserve those credits or exemptions for the residents
of that country. The principal purpose of the treaty viewed by a taxpayer
resident in a country such as Canada which merely adopts the internal
law credit and/or exemption provisions as the treaty provision to relieve
against double taxation should properly not be said to be to relieve against
double taxation, because that is dealt with in internal law. Apart from
mutual agreement procedures, such conventions themselves do not really
have as their principal purpose the avoidance of double taxation. It might
be more accurate to say that the main or principal purpose of Canada’s
tax treaties is to allocate and limit taxing powers of the two contracting
states. The statement of the purpose of the treaty to relieve against double
taxation in the title and in the preamble has, however, led Canadian courts
from time to time to adopt the statement as a talisman for the interpreta-
tion of the convention in accordance with the rules contained in article
31(1) of the Vienna Convention on the Law of Treaties, that a treaty is to
be interpreted in the light of its object and purpose.22
   Even though the OECD model does address the elimination of double
taxation, the OECD now recognizes that the model does not deal exclu-
sively with that, but also addresses other issues such as the prevention of
fiscal evasion and non-discrimination. Accordingly, the OECD dropped
the reference to the purpose of the treaty in the title to the model treaty
with the publication in 1992 of the ambulatory model, and does not refer
to the purpose of the treaty in a preamble. 23 Canada does not, as yet, seem
willing to adopt this new practice.
Article 1 (Personal Scope)
Like the OECD, Canada states that its tax treaties will apply to persons
who are residents of one or both of the contracting states. This is quali-
fied with the phrase “generally applicable” in the Canada- US tax
convention.
Article 2 (Taxes Covered)
Canada departs from the OECD model in that the OECD model extends to
taxes on income and capital imposed by political subdivisions and local

    22 Examples are the recent decision of the Supreme Court of Canada in The Queen v.
Crown Forest Industries Limited et al., 95 DTC 5389, at 5396 and the Federal Court of
Appeal decision in Utah Mines Ltd. v. The Queen, 92 DTC 6194, at 6196.
    23 See paragraph 16 of the introduction to the current OECD model: Organisation for
Economic Co-operation and Development, Model Tax Convention on Income and on Capi-
tal (Paris: OECD) (looseleaf ).

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authorities of the contracting state. In Canada’s conventions, the only
taxes covered are federal taxes, because the federal government does not
have the right to restrict the imposition of taxes by the provinces and
local authorities through federally negotiated and implemented income
tax conventions. Under the OECD model, a convention would extend to
“any additional or substantially similar taxes which are imposed after the
date of signature of the convention.” Canada, however, extends its trea-
ties to “any identical or substantially similar taxes and to taxes on capital
which are imposed after the date of signature of the convention.” There-
fore, Canada’s conventions would apply to any new taxes on capital
imposed after the convention is signed, whether or not such taxes are
identical or substantially similar to existing capital taxes.

Article 3 (General Definitions)
Canada adds to the general definitions a definition of the term “Canada”
and usually a definition of the other contracting state. The treaty will
define Canada in a geographical sense to mean the territory of Canada,
but it will also include any area beyond the territorial seas which, in
accordance with international law and the laws of Canada, is an area
within which Canada may exercise rights with respect to the seabed and
subsoil and their natural resources and the seas and air space above such
areas in respect of any activity carried on in connection with the explora-
tion for or the exploitation of the natural resources. Therefore, Canada
extends the operation of the treaties into the same area outside the terri-
tory of Canada in which Canada purports to extend its taxing power.24
   Canada also departs from the OECD model in defining a person gener-
ally to include an estate or trust, and sometimes adds to the definition of
a person a reference to a partnership.
   Canada departs from the OECD model in the definition of international
traffic. This departure is one of both language and substance. The
linguistic departure is to replace the OECD concept of a ship or aircraft
being operated by “an enterprise” that has its place of effective manage-
ment in a contracting state with the concept of a ship or an aircraft being
operated by a “resident of a contracting state.” The linguistic improve-
ment behind this change is to avoid the misuse of the term “enterprise” in
the sense used in the OECD model treaty in this and other articles of the
model, and replace it with the word “resident,” “person,” or “company,”



    24 Section 255 of the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended, and
section 5 of the Income Tax Conventions Interpretation Act, RSC 1985, c. I-4, as amended.
In Canada’s treaties with the United Kingdom, Sweden, the Netherlands, Norway, and
Finland, one can see a similar attempt on behalf of our treaty partners to extend the treaty
to their offshore resource areas. An interesting case arose in Norway under the
Norway-Switzerland treaty of 1956, which did not expressly extend to Norway’s continen-
tal shelf area: Heerena Marine Contractors SA v. Norway, a decision of the Supreme Court
of Norway of November 9, 1992, Inr 122/1992, nr. 1991.

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1730   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

depending on the particular place in the treaty in which the OECD
misuses the term “enterprise.”25
   The substantive part of Canada’s departure from the OECD definition
of international traffic is the replacement of the requirement that there be
a place of effective management in a contracting state with the require-
ment that the ship or aircraft be operated by a resident of a contracting
state. Because, as discussed below, Canada departs from the OECD model
in respect of the definition of residence of a corporation by embracing the
place of incorporation within the definition, this amendment is in part
consistent with that departure. It also avoids the awkwardness of the
OECD concept, which may be impossible to apply to a ship or an aircraft
operated by an individual rather than a corporation.
   In the most recently signed treaties, Canada continues to follow the
OECD wording of the controversial article 3(2). In the 1992 commentary
to article 3(2), the OECD made it clear that article 3(2) refers to the law in
force at the time the convention is being applied, not to the law in force
at the time the convention was made.26 Prior to that clarification, Canada
seemed to have been prepared to depart from the OECD wording of article
3(2) to make clear its ambulatory effect. For example, in the Canada-
Mexico treaty, article 3(2) provides that an undefined term shall have the
meaning it has in the tax law of the state applying the treaty at the time
the treaty is applied.

Article 4 (Resident)
Article 4 has been a troubling part of the OECD model for some time:
article 4(1) defines a resident of a contracting state to mean a person who,
under the laws of that state, is liable to tax therein by reason of his domi-
cile, residence, place of management, or any other criterion of a similar
nature, and leaves considerable doubt as to its effect where taxation is
based on the principle of territoriality. The OECD adds a second sentence
to article 4(1) to assist (or perhaps to further confuse) the reader: a resident


    25 Both the OECD and Canada define an enterprise of a contracting state to mean an
enterprise carried on by a resident of that state. The OECD then misuses the term “enter-
prise” to refer to the resident or a person. Canada corrects this. The misuse of the term
“enterprise” by the OECD occurs in articles 5(5) and (6), 6(4), 7(1), (2), and (5), 9(1) and
(2), 13(2), 22(2), (3), and (4), and 24(3) and (5). In Abed Estate v. The Queen, 82 DTC
6099 (FCA), a decision of the Federal Court of Appeal under the 1942 Canada-US income
tax convention, it was held that the income of a business operated in Canada by a US
resident was not treaty-protected because the business was separate from any business
activity carried on by the US resident and therefore did not constitute, in the opinion of
the court, a “United States enterprise” as defined under that convention. Under Canada’s
modern conventions, the careful use of the terminology dealing with an enterprise avoids
such a result.
    26 Section 3 of the Income Tax Conventions Interpretation Act, supra footnote 24, makes
it clear that, from a Canadian point of view, Canada takes the position that article 3(2) was
always intended to be ambulatory and not static in its application, contrary to the views
expressed by the Supreme Court of Canada in The Queen v. Melford Developments Inc., 82
DTC 6281.

(1995), Vol. 43, No. 5 / no 5
                                                          CANADA’S TAX TREATIES          1731

of a contracting state does not include any person who is liable to tax in
that state in respect only of income from sources in that state or capital
situate therein. Canada does not include this second sentence. This has
caused interpretive problems, which were only recently clarified by the
Supreme Court of Canada in The Queen v. Crown Forest Industries Lim-
ited et al.27 The difficulty with including the second sentence of article
4(1) is that it excludes virtually all taxpayers from qualifying as residents
of a contracting state in a state that adopts a territorial basis of taxation
and imposes no tax on foreign source income earned by its residents.
   Canada’s other departure from article 4(1) is to add to the definition of
the term “resident of a contracting state” a reference to government and
governmental authorities and agencies and instrumentalities of govern-
ment. Such entities are generally non-taxable and, if not referred to in the
definition, would not gain the benefits of the treaty.28
   The OECD model provides a tie-breaker rule to determine the residence
for treaty purposes of a person other than an individual that is resident in
both states to be the place of effective management. Canada, however, in
the case of a company that is resident in both states, provides a rule that
the company will be deemed to be a resident of the state of which it is a
national, and only if it is a national of neither of the two states is it
considered to be a resident of the state of the place of its effective
management.29
   Canada provides a final tie-breaking rule to determine the residence
for treaty purposes of dual-resident persons other than individuals or com-
panies by instructing the competent authorities of both contracting states
by mutual agreement to endeavour to settle the question. The Canadian
provision (unlike the OECD and Canadian provision applicable to indi-
viduals) goes on to instruct the competent authorities also to endeavour
“to determine the mode of application of the convention to such a person.”



   27 Supra  footnote 20, rev’g. 94 DTC 6107 (FCA).
   28 The  1995 amendments to the OECD model pick up this change. In the March 17,
1995 protocol amending the Convention Between Canada and the United States of America
with Respect to Taxes on Income and on Capital, signed at Washington, DC on September
26, 1980, as amended by the protocols signed on June 14, 1983 and March 28, 1984
(herein referred to as “the Canada-US tax convention”), Canada went further and included
in the definition of “resident” tax-exempt trusts, organizations, and arrangements operated
exclusively to administer pension and retirement or employee benefits and not-for-profit
organizations. That convention further provides that an estate or trust is a resident of a
contracting state only to the extent that the income derived by the estate or trust is liable
to tax in that state, either in the hands of the trustees or in the hands of the beneficiaries.
    29 Under article 3, a legal person, partnership, or association is a national of the con-
tracting state from which the legal person, partnership, or association derives its status as
such. There may be a slip in draftsmanship, because Canada’s article 4(3) contemplates a
company being a national of neither of the two contracting states, whereas the definition
of a national can be applied only in respect of a company that derives its status as such
under the laws of one of the two contracting states.

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1732   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

Article 5 (Permanent Establishment)
Canada departs from the OECD model by correcting the OECD wherever
it refers to an enterprise in a context in which the reference is to a
taxpayer or a person rather than to a business. The importance of this
change has already been discussed.30 Canada also adds to the OECD model
a clarifying statement that a place of business referred to in article 5(1)
includes a place of production. It is believed that this clarifying amend-
ment would have the effect of making an oil well, a mine, a farm, and a
manufacturing facility a permanent establishment, and therefore support-
ing an allocation to the manufacturing facility of a part of the profits of
the business even though the product that is produced in one contracting
state is sold in the other contracting state. However, the OECD and Canada
refer to a “mine,” “oil or gas well,” “quarry,” “factory,” and “workshop”
in article 5(3) of the OECD model and in the related paragraph of the
Canadian version. It is not clear, therefore, whether the specific reference
to a place of production adds anything of substance to the OECD model.
   The OECD model provides that a building site, construction, or instal-
lation project that lasts more than 12 months will be a permanent
establishment. Canada adds to the OECD wording by providing that an
assembly project lasting more than 12 months will also be a permanent
establishment. The UN model reduces the 12-month period to 6 months.
In dealing with developing countries, Canada will reduce the period to
accord with the UN model. The UN model also deems a permanent estab-
lishment to encompass the furnishing of services, including consultancy
services by an enterprise through employees or other personnel where
activities of that nature continue (for the same or a connected project)
within the country 31 for a period or periods aggregating more than 6
months within any 12-month period. Canada will include this provision
when dealing with developing countries.
   Both the OECD and UN models provide that a dependent agent who has
and habitually exercises an authority to conclude contracts will constitute
a permanent establishment. The UN model also provides that an agent
who has no authority but who habitually maintains a stock of goods or
merchandise from which he delivers goods on behalf of the enterprise
will be a permanent establishment. In dealing with developing countries,
Canada will include this UN provision but, where it is included, Canada
will (in contrast to the UN model) alter the “independent agent” part of
the definition of a permanent establishment to exclude from the definition
an independent agent who maintains a stock of goods from which deliver-
ies are made by the agent, provided, of course, that the agent is acting in
the ordinary course of his business.




   30 See   supra footnote 25 and related discussion.
   31 The   word “country” should properly read “state.”

(1995), Vol. 43, No. 5 / no 5
                                                          CANADA’S TAX TREATIES           1733

Article 6 (Income from Immovable Property)
Article 6(2) of the OECD model defines the term “immovable property”
without stating whether the definition is for the purposes of article 6 or
for the purposes of the convention. Canada clarifies this point by making
it clear that the definition applies for the purposes of the convention. The
OECD model excludes ships, boats, and aircraft from the definition. For
some reason, Canada does not refer to boats being excluded from the defi-
nition of immovable property; however, this probably does not have any
importance because a boat is clearly not immovable property in any event.

Article 7 (Business Profits)
Canada clarifies the OECD model, which refers to “profits of an enter-
prise of a contracting state,” by describing the profits with more
particularity as “business profits.” 32 Canada, of course, corrects the
misreference to an enterprise of a contracting state by using the correct
expression “resident of a contracting state.” The OECD authorizes source
taxation of business profits if the resident of the other contracting state
carries on business through a permanent establishment situate in the con-
tracting state. Canada extends this concept by authorizing source taxation
of business profits if the resident of the other contracting state “carries on
or has carried on business” through a permanent establishment situate in
that state. This makes it clear that business profits arising after the
non-resident has closed or disposed of the permanent establishment may
still be taxed in the source country. However, such profits are taxable at
source under both the OECD and Canadian versions of article 7(1) if and
to the extent that they are attributable to the permanent establishment.
Business profits arising subsequent to the closing of a permanent estab-
lishment and not attributable to the former permanent establishment should
not, therefore, be subject to taxation at source.
   In dealing with developing countries, following the UN model, Canada
authorizes the source country to tax profits not only attributable to the
permanent establishment but also attributable to sales of goods or mer-
chandise of the same or similar kind as those sold through the permanent
establishment and profits attributable to any other business activities car-
ried on in the source state of the same or similar kind as those effected
through the permanent establishment.
   Article 7(2) of the OECD model states that the profits of a permanent
establishment shall be those that it might be expected to make if it were a
distinct and separate enterprise engaged in the same or similar activities
under the same or similar conditions and dealing wholly independently
with the enterprise of which it is a permanent establishment. Canada
improves this wording by stating that the profits shall be determined as if

   32 It is interesting to note that Canada adopts the word “profits” in article 7, but uses the
word “income” in article 9. This may support the argument referred to below, and infra foot-
note 33, that profits of a permanent establishment are to be computed by including the results
of notional transactions, which, of course, are not permitted under the Income Tax Act.

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1734   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

the permanent establishment were dealing wholly independently with the
resident of the other contracting state and with all other persons.
   It is interesting to note that, in article 7(3) of the UN model, a great
deal of clarity is provided in the stipulation that, in computing the income
of a permanent establishment, deductions (other than by reimbursement of
actual expenses) are not permitted for certain notional transactions be-
tween the permanent establishment and the head office for such things as
royalties for use of patents, commissions for specific services or for man-
agement, and, except in the case of a banking enterprise, by way of interest
on money lent to the permanent establishment. Canada does not generally
include these clarifying provisions in its treaties with developing coun-
tries. The very fact that the UN model has referred to these “notional”
payments would lend support to the proposition that, in the absence of
such prohibitions, such notional payments would have to be recognized
consistent with the fiction that the permanent establishment is a separate
and distinct enterprise dealing wholly independently with the head office
under article 7(2). Canada does not agree with that interpretation of arti-
cle 7(2), and this probably leads it to refuse to include the clarification
provisions of the UN model when dealing with developing countries, pre-
sumably because to do so would indicate that, in the absence of those
provisions in other treaties, such deductions should be recognized.33
   Article 7(4) of the OECD model authorizes the use of a formulary
apportionment of total profits of a business to its various parts for the
purposes of determining the profits of a permanent establishment. Canada
normally does not include this provision in its tax treaties.34

    33 In Twentieth Century Fox Film Corp. v. The Queen, 85 DTC 5513 (FCTD), Addy J,
in obiter, said that the slightly differently worded article 7(2) of the 1942 Canada-US
income tax convention did not authorize a deduction for a “notional” payment of film
royalties by the permanent establishment to the head office. This same finding was made
in respect of a notional payment of rent for equipment by the Canadian permanent estab-
lishment from the US head office also under the 1942 treaty by the Tax Court in Cudd
Pressure Control Inc. v. The Queen, 95 DTC 559. It is suggested that the current wording
of the OECD model, and more clearly the wording Canada has adopted in its article 7,
would not only authorize but should require such notional payments to be taken into
account, as it requires that profits shall be calculated on the basis that the permanent
establishment be deemed to be a separate person and be deemed to deal with the resident
of the other contracting state (that is, the resident of the other state must be deemed to deal
with itself) independently. Contrary views are, however, expressed by the OECD in Model
Tax Convention: Attribution of Income to Permanent Establishments, Issues in Interna-
tional Taxation no. 5 (Paris: OECD, 1994), and in the current commentary to article 7 of
the OECD model. A discussion of the relevance of the commentary and other OECD
publications where they seem to be at variance with the wording of the model or the
particular convention in issue is beyond the scope of this paper.
    34 It is interesting to note that the 1995 OECD publication, Transfer Pricing Guidelines
for Multinational Enterprises and Tax Administrations (Paris: OECD, July 1995), has been
endorsed in Canada, Department of Finance, Release, no. 95-059, July 28, 1995 (but not
yet by Revenue Canada) and it supports a profit split method, as a last resort, in determin-
ing the profits of separate but related corporations. It is not known, therefore, why Canada
would not always want to include the OECD paragraph authorizing profit splits in its tax
                                                 (The footnote is continued on the next page.)

(1995), Vol. 43, No. 5 / no 5
                                                       CANADA’S TAX TREATIES          1735

   Article 7(3) of the OECD model provides that, in determining the prof-
its of a permanent establishment, there shall be allowed as deductions
expenses incurred for the purposes of the permanent establishment, in-
cluding executive and general administrative expenses whether incurred
in the state of the permanent establishment or elsewhere. Canada clarifies
this by limiting the deduction to those expenses that are deductible under
the laws of the contracting state in which the permanent establishment is
situated.35

Article 8 (Shipping and Air Transport)
Because Canada does not include generally in its tax treaties article 8(2)
of the OECD model, which deals with profits from the operation of boats
engaged in inland waterways transport, Canada shortens the title of this
article to “Shipping and Air Transport,” whereas the OECD title is “Ship-
ping, Inland Waterways Transport and Air Transport.” Canada does follow
the OECD model in exempting from source taxation profits derived by a
resident of the other contracting state from the operation of ships and
aircraft in international traffic, giving the exclusive right to tax to the
state of residence. The OECD offers a different test from the test of resi-
dence, namely, the test as to the place of effective management of the
enterprise. The commentary to the OECD model notes that the place of
effective management may not be the state “of which an enterprise oper-
ating ships or aircraft is a resident,” and states that countries may prefer
to confer the exclusive right to tax on the state of residence. Canada
adopts this practice.
   Instead of dealing separately with the profits of the operation of boats
in inland waterways transport as the OECD does in article 8(2), Canada
provides in article 8(2) that profits derived from the operation of ships or
aircraft between places in a contracting state may, notwithstanding para-
graph (1), be taxed in that state.
   Article 8(3) of the OECD model deals with the place of effective man-
agement when it is aboard a ship or boat. In Canada’s form of treaty, this
paragraph is unnecessary, and therefore does not appear.
   Article 8(4) of the OECD model provides that the provisions of para-
graph (1) shall also apply to the profits from participation in a pool, joint
business, or international operating agency. Canada adopts a broader po-
sition, making both paragraph (1) (international traffic) and paragraph (2)


34 Continued . . .
treaties to compute the profits of a permanent establishment. Canada does sometimes
include that paragraph, but it is not known whether those inclusions arise because of the
views of the other contracting state or because of Canada’s views.
    35 This point is also dealt with under section 4(b) of the Income Tax Conventions
Interpretation Act, supra footnote 24. The concern to limit deductible expenses of a perma-
nent establishment to the kind of expenses deductible under the Income Tax Act (or,
putting it another way, to exclude from deductible expenses those expenses that are not
deductible) has been found to be unnecessary: Utah Mines Ltd., supra footnote 22.

                                                               (1995), Vol. 43, No. 5 / no 5
1736   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

(operations between places in the same state) apply to profits derived from
participation in a pool, joint business, or international operating agency.

Article 9 (Associated Persons)
Canada amends the OECD language in articles 9(1) and (2) by correcting
the use of the OECD term “enterprise” and substituting for it the more
correct “resident” or “person,” and changing the OECD’s “profits” to “in-
come.” The misuse by the OECD of the term “enterprise” has previously
been discussed. The change of the word “profits” to “income” is probably
designed to ensure that that term, which is undefined, will be defined for
Canadian purposes by reference to the provisions of the Income Tax Act
so that the various inclusions and deductions will apply in order to com-
pute income for tax purposes.
   Canada adds a limitation period to article 9 to prohibit changes in the
income of a person by a contracting state in circumstances referred to in
article 9(1) after the time limits have expired in the internal laws of that
state and, in any case, after five years from the end of the year in which
the income the contracting state seeks to change would have accrued. The
limitation period is, however, inapplicable in the case of “fraud, wilful
default or neglect.”36

Article 10 (Dividends)
In the OECD model, the rate of withholding taxes on dividends is fixed at
a maximum of 15 percent and reduced to 5 percent for dividends paid to
a company that holds directly at least 25 percent of the capital of the
payer. In the UN model, the rate of withholding tax is not prescribed. In
negotiating with developed countries, Canada now follows the OECD rec-
ommendations generally in respect of the rates of withholding tax on
dividends. 37 In negotiating with developing countries, however, Canada
will permit the developing country to impose a withholding tax on divi-
dends paid to residents of Canada by residents of the developing country
at a rate higher than 15 percent, while generally maintaining the 15 per-
cent maximum for the rate of Canadian withholding tax. The reduced rate
of withholding tax in treaties with developing countries has in the past
been fixed at 10 percent, and it is not known whether the new treaty
policy of reducing the rate to 5 percent will extend to developing countries.
   In article 10(2) of the OECD model, the 5 percent withholding tax is
provided in respect of dividends “if the beneficial owner is a company
(other than a partnership) which holds at least 25 per cent of the capital.”

    36 The phrase “fraud, wilful default or neglect” has undoubtedly been taken from
subparagraph 152(4)(a)(i) of the Income Tax Act. It is interesting to note that subpara-
graph 152(4)(b)(iii) provides an extended three-year period beyond the “normal reassessment
period” for reassessments arising as a consequence of a transaction involving the taxpayer
and a non-resident person with whom the taxpayer does not deal at arm’s length. This
internal law limitation period is, of course, much longer than the limitation period Canada
currently includes in article 9 of its tax treaties.
    37 The 5 percent rate will, where included in treaties, be phased in by 1997.



(1995), Vol. 43, No. 5 / no 5
                                                         CANADA’S TAX TREATIES          1737

Canada changes this phrase and substitutes “if the beneficial owner is a
company which controls directly or indirectly at least 25 per cent of the
voting power.”
   The OECD ’s inclusion of the reference to a partnership in article 10(2)
is puzzling because paragraph (2) refers to the dividends mentioned in
paragraph (1), and paragraph (1) deals with dividends paid by a company
that is a resident of one of the states to a resident of the other state.
Normally, a partnership is not a taxable entity, and therefore cannot be a
resident within the definition of a resident of a contracting state in article
4 (although occasionally Canada includes a reference to a partnership in
the definition of the term “person” in article 3). The OECD commentary
states that if a partnership is treated as a body corporate under domestic
laws, the two contracting states may agree to modify the wording to give
the benefits of the reduced rate of tax of 5 percent to such partnerships. It
is suggested that if a partnership is not a body corporate, the OECD refer-
ence to excluding a partnership from the lower rate of withholding tax
under article 10(2) is incorrect, and Canada’s position in removing this
reference constitutes an improvement.
   Neither Canada nor the OECD deals adequately with dividends (or in-
terest or royalties) paid to a partnership. On one view, because a partnership
is not a resident of a contracting state, in most cases the treaty would be
wholly inapplicable to a dividend paid to a partnership. On another view,
where the partnership is not a legal entity, dividends paid to a partnership
should be considered to be paid to the partners in the proportion in which
they share the dividends, and therefore the treaty should apply to those
portions of the dividend attributable to partners resident in the other con-
tracting state. Revenue Canada seems to take a hybrid position, namely,
that the lower rate of withholding tax (generally 5 percent) on dividends
paid if the beneficial owner is a company that controls at least 25 percent
of the voting power does not apply to a dividend paid to a partnership
even though a company resident in the other contracting state may hold,
through the partnership, at least 25 percent of the voting power.38 Some-
what inconsistently, Canada seems to consider, for the purposes of applying
the full rate of withholding tax (generally 15 percent) on dividends paid
to a partnership, that those dividends are paid proportionately to the part-
ners—that is to say, the partners are the recipients and beneficial owners
so that the treaty rate of withholding tax applies.


   38 The wording of article X(2) of the Canada-US tax convention is a bit different, as it
applies the lower rate of withholding tax “if the beneficial owner is a company which
owns at least 10 per cent of the voting stock.” Here Revenue Canada’s position is more
consistent with the theory on which the Income Tax Act has been drafted, namely, that a
partner does not own partnership assets, and therefore a corporate partner of a partnership
does not own any of the shares of a Canadian company that may be owned by the partner-
ship. This position is less valid in the case of a treaty that contains wording quoted in the
text above, as a partner would appear to be a beneficial owner and also to control the
voting power in respect of shares held by the partnership in a company, particularly if the
corporate partner is a controlling partner in the partnership.

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1738   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

   The OECD model contains a statement that the competent authorities
will, by mutual agreement, settle the mode and application of the limita-
tions on withholding tax. Canada usually omits this provision from the
treaties.
   In the OECD model, the term “dividends” for the purposes of article 10
is defined. The definition includes “income from other corporate rights
which is subjected to the same taxation treatment as income from shares
by the laws of the state of which the company making the distribution is
a resident.” Canada adopts clearer wording by including “income which
is subjected to the same taxation treatment as income from shares by the
laws of the state of which the company making the distribution is a
resident.”39
   The OECD model provides in article 10(4) that the provisions of both
paragraphs (1) and (2) will not apply if the beneficial owner of the divi-
dends carries on business in the contracting state of which the company
paying the dividends is a resident through a permanent establishment or
performs independent personal services from a fixed base there and the
holding in respect of which the dividends are paid is effectively connected
with the permanent establishment or fixed base. The OECD, therefore,
excludes the application of the provision that says that the dividends may
be taxed by the residence state and states instead that the provisions of
article 7 or 14, as the case may be, shall apply; and, of course, under
articles 7(1) and 14(1) the residence state is entitled to tax the dividends
as being included in the profits of the resident. Those articles also permit
the source state to tax the profits, which would include the dividends on
a net basis. However, in some treaties, business profits of a resident of
the other state attributable to a permanent establishment in Canada are
exempt from taxation in the residence state. In such cases Canada will
permit the treaty to follow the language of the OECD model and make it
clear that both paragraphs (1) and (2) of article 10 would not apply. 40

    39 It would appear that Canada wants to ensure that all deemed dividends would be
included in this definition. The OECD wording might not be broad enough to include
amounts that are deemed to be dividends under section 212.1 of the Income Tax Act
because these deemed dividends, being the proceeds of sale of shares, might not be said to
be “income from other corporate rights.” Similarly, benefits conferred on a shareholder
included in the income of a resident shareholder under subsection 15(1) are deemed to be
dividends when conferred on a non-resident shareholder by paragraph 214(3)(a) of the
Income Tax Act, and these too could be said not to be income from other corporate rights.
    40 See, for example, article 10(4) of the Agreement Between Canada and the Federal
Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on
Income and Certain Other Taxes, signed at Ottawa on July 17, 1981. In the Canada-Hungary
income tax convention, under which Hungary exempts from tax all Canadian source in-
come other than income taxable by Canada in accordance with the provisions of article 10,
it would seem that Canada should also have referred to paragraphs (1) and (2) of article 10
in article 10(4). See the Convention Between the Government of Canada and the Govern-
ment of the Republic of Hungary for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income and on Capital, signed at Budapest on
April 15, 1992, as amended by the protocol signed on May 5, 1994 (herein referred to as
“the Canada-Hungary tax convention”).

(1995), Vol. 43, No. 5 / no 5
                                               CANADA’S TAX TREATIES        1739

   Canada normally adds to article 10 a paragraph that is not in the OECD
model, and that would conflict with the non-discrimination provision of
the OECD model. The additional paragraph usually starts with the word-
ing, “Nothing in this convention shall be constructed as preventing,” and
therefore overrides any non-discrimination article and authorizes the im-
position of a branch tax on the earnings attributable to a permanent
establishment.
   In 1995, the OECD model was amended to clarify the operation of the
beneficial ownership test in article 10, as well as article 11. The text of
this amendment was not published at the time of writing.

Article 11 (Interest)
Canada now seems to adopt, in dealing with developed countries, the
OECD recommendation to limit the rate of withholding tax on interest to
10 percent. However, treaties with developing countries generally fix the
rate at 15 percent or higher for interest paid to a Canadian resident from
the developing country, although Canada will generally fix the rate of its
tax at 15 percent. Occasionally, both countries are permitted to charge a
withholding tax rate on interest higher than 15 percent.
   As is the case in the dividend article, the OECD model includes a
sentence in article 11(2) authorizing the competent authorities by mutual
agreement to settle the mode and application of the limitation of with-
holding tax. Canada generally omits this sentence from its treaties.
   Canada will frequently include specific provisions in the interest arti-
cle to exempt from source taxation interest paid on government debt or
debt of government agencies to a resident of the other contracting state.
In addition, Canada may include a provision to exempt from source tax
interest arising in one contracting state and “paid to a resident of the
other contracting state who is constituted and operated exclusively to
administer or provide benefits under one or more pension, retirement or
other employee benefit plans” if the beneficial owner is generally exempt
from tax in the other state and the interest is not derived from carrying on
a trade or a business. Because the definition in article 4 of a resident of a
contracting state normally requires that the person be subject to tax, un-
less article 4 of the particular treaty also includes in the definition of
“resident” a pension, retirement, or employee benefit plan that is exempt
from tax, such a plan might not be considered to be a resident; therefore,
the language Canada adopts in an attempt to provide for an exemption
from withholding tax may in fact often be defective.
   The OECD provides a definition of the term “interest” that is independ-
ent of internal law definitions. Canada, however, includes in the definition
“income which is subject to the same taxation treatment as income from
money lent by the laws of the state in which the income arises,” clearly
including in the interest article items of income that are deemed to be
interest under the internal law of the source state. To make sure that there
is no overlap, Canada excludes from the definition of interest any income

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1740   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

that is dealt with under article 10, which deals with dividends. The OECD
does not make that clarification, but, in the commentary to both articles
10 and 11, the OECD seems to clarify in cases of thin capitalization that
when the amount paid as interest can be taxed under article 10 as a
dividend, such an amount will not be included in interest under article 11.
Canada’s practice of including a specific provision to this effect in the
definition of interest is an improvement on the OECD model.
   The OECD model also includes in the definition of interest income
from debt claims “whether or not carrying the right to participate in the
debtor’s profits.” Canada does not generally include that phrase. This
would mean that that part of the OECD commentary to article 11 which
states that interest on participating bonds would not normally be consid-
ered a dividend probably is inapplicable to treaties negotiated by Canada
that do not follow this OECD language.
   Finally, the OECD model contains a specific statement that penalty
charges for late payment will not be regarded as interest. Canada gener-
ally omits that sentence.
   The OECD model, in dealing with interest, follows the same pattern it
does with dividends and provides that paragraphs (1) and (2) of article 11
will not apply to interest on debt claims effectively connected with a
permanent establishment. As is the case with dividends, Canada normally
omits the reference to paragraph (1) of article 11, thereby permitting the
residence state to continue to tax the interest as interest rather than as
business profits.
   In the interest article, the OECD provides that the interest will be deemed
to arise in a contracting state when the payer is a resident of that state or
is itself the state or a political subdivision or local authority thereof. As
Canada provides in article 4 that a state, a political subdivision, and a lo-
cal authority are residents for the purposes of the treaty, Canada does not
follow the OECD wording, and merely provides that the interest is deemed
to arise in a contracting state when the payer is a resident of that state.41


Article 12 (Royalties)
The OECD model provides that royalties arising in one state and paid to a
resident of the other shall be taxable only in the other. Canada does not
apply this general rule, and normally allows for a 10 percent tax to be
withheld at source. This is more consistent with the UN model, although the
UN model does not state the rate of tax to be withheld at source. Canada’s
practice in dealing with developing countries follows no particular pattern.
Some of the treaties contemplate a maximum 10 percent withholding at
source on royalties; others provide for taxes at rates greater than that.

    41 Both the OECD and the Canadian practice also include a reference to interest paid
by a person, whether or not resident of a contracting state, that is borne by a permanent
establishment or a fixed base in a contracting state.

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                                                         CANADA’S TAX TREATIES          1741

   Canada normally adds an exemption provision from withholding tax
for “copyright royalties and other like payments in respect of the produc-
tion or reproduction of any cultural, dramatic, musical or artistic work”
(other than motion picture and videotape royalties, provided that the re-
cipient in the other contracting state is subject to tax on those royalties).42
   Canada also now will exempt royalties for the use of patents or for
information concerning industrial, commercial, and scientific experience.43
   Both Canada and the OECD define the term “royalties,” but Canada
departs from the OECD definition in several respects. The OECD includes
payments for cinematograph films. Canada is more particular, and in-
cludes payments in respect of “motion picture films and works on film,
video tape and other means of reproduction for use in connection with
television.” The OECD definition specifies payments for the right to use
“copyright of any literary, artistic or scientific work, including cinemato-
graph films, any patent, trademark, design or model, plan, secret formula
or process.” Canada adds to this list of items “or other similar intangible
property.”44
   The OECD model does not provide any rule in the royalty article deem-
ing royalties to arise in the contracting state of which the payer is a
resident or the contracting state in which a permanent establishment or
fixed base is situate with respect to which the obligation to pay the royal-
ties was incurred if such royalties are borne by the permanent establishment

    42 This exemption is similar to but may not be identical to that which is provided in
subparagraph 212(1)(d)(vi) of the Income Tax Act. That exemption applies to “a royalty or
similar payment on or in respect of a copyright in respect of the production or reproduc-
tion of any literary, dramatic, musical or artistic work.” Revenue Canada seems to take the
position that payments for such things as software are not payments on or in respect of
copyright in respect of the production or reproduction of the copyright in the work, and
therefore are not exempt from withholding tax. The treaty wording may not so clearly
require that copyright royalties be in respect of the production or reproduction of work,
but only that the “other like payments” be in respect of the production or reproduction of
the work in order to be exempt. Because of the definition of the term “royalties” in
Canada’s usual treaties as “consideration for the use of or the right to use any copyright,”
the argument can be made that the term “copyright royalties” applies to any payment for
the right to use copyright whether or not it is in respect of the production or reproduction
of a work. It should be noted that the 1995 amendments to article XII(3) of the Canada-US
tax convention clarified that payments for the use of, or the right to use, computer soft-
ware are exempt. It is too soon to know whether Canada will be prepared to make this
clarification in other treaties.
    43 See article XII(3)(c) of the Canada-US tax convention, as amended in 1995.
    44 In article XII(4) of the Canada-US tax convention, the definition of royalties extends
to payments “for the use of, or the right to use, tangible personal property” and includes
“gains from the alienation of intangible property or rights [referred to in the definition] to
the extent that such gains are contingent on the productivity, use or subsequent disposition
of such property or rights.” Including such additional items in the definition of royalties
limits the withholding tax on payments for the use of such rights to the 10 percent treaty
rate. Otherwise, the payments would fall under the other income article unless they consti-
tuted part of the business profits of the recipient. If the payments fall under the other
income article, there is no limitation of the withholding tax, and Canada would impose a
25 percent tax on such rents.

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1742   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

or fixed base. Because Canadian treaties provide for source taxation of
royalties, Canada needs a source rule and normally provides one similar
to that used for dividends and interest.
   In dealing with developing countries, Canada, either in the royalties
article or in a separate article, often adds a provision dealing with techni-
cal fees, which are defined to be payments to persons, other than
employees, for services of an administrative, technical, managerial, or
consultancy nature, unless they are reimbursements of actual expenses
incurred by the recipient. Canada’s practice is to limit the amount of tax
to be withheld at source to between 10 and 30 percent. The rate generally,
but not always, is the same as the rate applicable to royalties. This provi-
sion has no counterpart in the OECD or the UN model.

Article 13 (Capital Gains)
With unimportant wording changes, Canada adopts the provisions of para-
graphs (1) and (2) of article 13 of the OECD model giving the situs state
the right to tax gains on immovable property and the property of a perma-
nent establishment. In dealing with gains from the alienation of ships and
aircraft operated in international traffic, together with movable property
pertaining to the operation of such ships and aircraft, Canada provides
that the exclusive right to tax will be that of the contracting state of
residence of the operator of the ship or aircraft. The OECD gives the
exclusive right to the contracting state “in which the place of the effec-
tive management of the enterprise is situated,” which is a less clear rule.
The OECD also extends that exclusive right to tax to boats engaged in
inland waterways transport and movable property pertaining to such boats.
Canada does not do so.
   The OECD model gives the exclusive right to tax gains on the aliena-
tion of any other property to the contracting state of which the alienator
is a resident. Canada’s treaty practice is much more complex. First, gains
from the alienation of shares of a company that is a resident of one of the
states, the value of which is derived principally from immovable property
situate in that state, and gains from the alienation of a substantial interest
in a partnership, trust, or estate established under the law of one of the
states, the value of which is derived principally from immovable property
situate in that state, may be taxed in that state. An exception is usually
provided for shares quoted on an approved stock exchange of the state of
residence of the company. This right to source taxation often cascades
because of a definition of immovable property that is included in Cana-
da’s treaties to deem immovable property to include shares of a company
or an interest in a partnership, trust, or estate, the value of which is
principally derived from immovable property in that state. Normally, an
exception is made for rental property in which the business of the com-
pany, partnership, trust, or estate is carried on.
   Canada also includes a provision authorizing a deferral of gain for tax
purposes where a resident of one state alienates property in the course of
a corporate organization, reorganization, amalgamation, division, or similar

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                                                        CANADA’S TAX TREATIES          1743

transaction and the profit, gain, or income is not recognized for purposes
of taxation in the state of residence. If requested by the person who
acquires the property, the competent authority of the other state may then
agree, subject to terms and conditions, to defer the recognition of the
profit, gain, or income in respect of the property until such time and in
such manner as may be stipulated in the agreement.45
   Canada then generally gives up its right to tax capital gains on the
alienation of any other property and gives the exclusive right to tax those
gains to the contracting state of which the alienator is a resident. How-
ever, Canada’s treaties will invariably preserve the right to tax at source
according to domestic law gains derived by an individual resident of the
other contracting state who had been a resident of the source state at any
time during a period of years (normally six) preceding the alienation of
the property. Sometimes Canada will also give up the right to tax gains
from the alienation of property by former residents within the first six
years, provided that the property was never owned by the individual while
he was a resident.46

Article 14 (Independent Personal Services)
Canada follows the OECD model when dealing with developed countries.
When dealing with developing countries, however, Canada follows gener-
ally the UN model and authorizes source taxation of income from
independent personal services in the absence of a fixed base if the tax-
payer’s stay in the source state is for a period or periods amounting to or
exceeding 183 days in any 12-month period commencing or ending in the
calendar year concerned. Canada (unlike the UN model) deems such a
taxpayer to have a fixed base in the source state during the period and
deems the income derived from the activities during that period to be
attributable to that fixed base.

Article 15 (Dependent Personal Services)
The OECD model provides that remuneration of a resident of one state in
respect of employment exercised in the other is taxable only in the resi-
dence state if the recipient is present in the other state for periods less
than 184 days in any 12-month period commencing or ending in the fiscal
year concerned and the remuneration is paid by or on behalf of an em-
ployer who is not a resident of that other state and the remuneration is not
borne by a permanent establishment or fixed base of the employer in the
other state. Canada normally varies these provisions by changing the ref-
erence to the “fiscal year concerned” to the “calendar year concerned” and

    45 This provision first appeared in the Canada-US tax convention and is now seemingly
becoming part of the standard Canadian treaty practice.
    46 For example, see article 13(7) of the Canada-Hungary tax convention. This exclusion
is interesting, as it presumably opens the way for a resident of the other contracting state
to carry out a rollover transaction (perhaps under section 85 of the Income Tax Act) and
then to dispose of the property received on the rollover transaction claiming treaty
protection.

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1744   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

providing an alternative basis for exemption if the remuneration does not
exceed a certain de minimis amount, normally the equivalent of Cdn.$5,000,
in which case there will be no source taxation even if the remuneration is
paid by or on behalf of an employer resident in the source state or is borne
by a permanent establishment or fixed base in the source state.
   The OECD model also gives the right to tax remuneration from em-
ployment exercised aboard a ship or aircraft operated in international
traffic or aboard a boat engaged in inland waterways transport to the
contracting state “in which the place of effective management of the
enterprise is situated.” Canada, in contrast, removes references to remu-
neration from employment aboard a boat engaged in inland waterways
transport and gives the right to tax to the contracting state of residence of
the operator of the ship or aircraft. Neither the OECD model nor Canada’s
treaties give the exclusive right to tax to the contracting state of the place
of effective management or the contracting state of residence of the op-
erator, as the case may be.

Article 16 (Directors’ Fees)
Canada follows the OECD wording almost exactly, although it does ex-
tend article 16 not only to a “member of the board of directors of a
company,” but also to a “member of . . . a similar organ of a company.”
This is in response to the OECD commentary, which notes that in some
countries organs of companies exist that are similar in function to the
board of directors, and that states are free to include such organs of
companies in their bilateral conventions.
   The UN model also deals with remuneration of a resident of one state
in his capacity as “an official in a top level managerial position” of a
company which is resident in the other, allowing the remuneration to be
taxed in that other state. Canada generally does not include this provision
in any of its treaties.

Article 17 (Artistes and Sportsmen)
Article 17(1) of the OECD model overrides articles 14 (independent per-
sonal services) and 15 (dependent personal services) and provides that
income of an entertainer or sportsman who is resident in one contracting
state from his activities in the other may be taxed in that other state. In
Canada’s treaties, article 7 is also overridden to ensure that source taxa-
tion is possible in the absence of a permanent establishment in the event
that the entertainer or sportsman would take the position that he or she
carries on a business rather than merely provides dependent or independ-
ent personal services. Canada has not yet followed the change made in
the OECD model in 1992, which substituted the word “sportsman” for the
previous word “athlete,” a word that may have a narrower meaning.47


   47 It may be a safe bet that when Canada makes this change it will use the word
“sportsperson.”

(1995), Vol. 43, No. 5 / no 5
                                                         CANADA’S TAX TREATIES          1745

   Canada follows the OECD model by including in article 17(2) in its
treaties a provision authorizing taxation on the individual entertainer or
sportsperson on income that accrues to another person. However, Canada,
in line with its reservation noted in the commentary to the OECD model,
adds paragraph (3) to article 17 to qualify the application of paragraph
(2), stating that it does not apply this rule “if it is established that neither
the entertainer or the athlete nor persons related thereto, participate di-
rectly or indirectly in the profits of the person referred to in [paragraph
(2)].” Further, Canada adds paragraph (4), stating that articles 17(1) and
(2) shall not apply to income derived from activities performed in a con-
tracting state by a non-profit organization or by entertainers or athletes if
the visit to that contracting state is substantially supported by public
funds and the activities are not performed for the purposes of profit.48

Article 18 (Pensions)
Canada virtually rewrites the OECD model provision into a much ex-
panded form, and deals with a great many other matters than the OECD
attempts to do. The OECD model, while reserving the exclusive right to
tax government pensions to the contracting state in which the government
is located unless the recipient of the pension is a resident and national of
the other state (in which case the other state has the exclusive right to
tax), provides that all other pensions and similar remuneration in consid-
eration of past employments shall be taxable only in the state of residence
of the recipient.
   Article 18(1) of Canada’s treaties, when dealing with developed coun-
tries, normally extends to pensions and annuities and gives the state of
residence of the recipient a right to tax. Paragraph (2) also gives the state
of source the right to tax such pensions or annuities and, in the case of
periodic pension and annuity payments, limits the tax rate to 15 percent.49
There are some departures. In one recent treaty, for example, article 18(2)
does not refer to pensions and annuities but rather to “pensions, including
alimony and similar payments.”50

    48 There seems to be an intention that income derived in one state from activities of
this sort performed by residents of the other state should be exempt from source taxation.
However, the actual result seems to be that income of this type is simply removed from
article 17 and falls within article 21 (other income), and becomes subject to unlimited
taxation at source. To achieve the result that is presumably intended, Canada’s treaties
should state not that the provisions of article 17(1) and (2) shall not apply to such income,
but that the contracting state in which the activities are performed shall not tax such
income. In 1995, the OECD model was changed to provide that artistes and sportsmen
employed by governments will be taxable under article 17, not article 19.
    49 Section 5 of the Income Tax Conventions Interpretation Act, supra footnote 24,
defines the word “annuity” and the phrase “periodic pension payment.”
    50 See the Canada-Hungary tax convention. In article 18(2) of that treaty, the source
rate of taxation on periodic pension payments is limited to the lesser of 15 percent and the
rate that the recipient would have been required to pay on the total amount of the periodic
pension payments received in the year if he was a resident of that state. Although alimony
                                               (The footnote is continued on the next page.)

                                                                (1995), Vol. 43, No. 5 / no 5
1746   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

   When dealing with developing countries, there does not seem to be much
of a pattern. In some treaties, the source state of a pension is given the
sole right to tax. In other treaties, the source state has a right to tax which
is limited, but the limitation may be a 15 percent rate or a higher rate.
   In Canada’s treaties, the limitation on source tax generally does not
apply to lump-sum payments arising on the surrender, cancellation, re-
demption, sale, or other alienation of a pension plan or an annuity.
   Canada also usually exempts from tax in the recipient’s state of resi-
dence a war veteran’s pension or allowance if it is exempt from tax in the
state of source. Alimony, maintenance, and similar payments are also
exempted from source tax if the recipient resident in the other contracting
state is subject to tax on those amounts. In some of the treaties, pensions
and allowances paid under social security legislation of one state to a
resident of the other state are exempt from tax in the residency state if
they are subject to tax in the source state.

Article 19 (Government Service)
Canada generally adopts the basic rule contained in article 19(1) of the
OECD model that remuneration, other than a pension paid by a govern-
ment authority to an individual in respect of services rendered to the
government authority, is taxable only in the state of that government
authority. However, such remuneration will be taxable only in the other
contracting state if the services are rendered in that state and the indi-
vidual is a resident and national of that state and did not become a resident
of that state solely for the purpose of rendering the services.
   Canada also adopts (with some wording changes) article 19(3) of the
OECD model to state that the aforementioned rules do not apply to remu-
neration in respect of services rendered in connection with a business
carried on by a contracting state or other government authority.
   The OECD model, in article 19(2), provides rules setting out the right to
tax government pensions paid to individuals for services to the govern-
ment authorities stating that the pensions will be taxable only in the state
of the government authority unless the individual is both a resident and a
national of the other state, in which event the other state shall have the sole
right to tax. Canada does not generally include this provision in its treaties.

Article 20 (Students)
The OECD article extends to students or business apprentices. Canada’s
wording is a bit broader, extending to students, apprentices, and business
trainees. Otherwise Canada follows the OECD model.


50Continued . . .
and similar payments are referred to in article 18(2), there is no limitation on the source
rate of tax when applicable to those payments. Annuities are dealt with in the
Canada-Hungary tax convention under article 18(3), which limits the tax to 10 percent of
the portion of the payments that is subject to tax in the state of source.

(1995), Vol. 43, No. 5 / no 5
                                                      CANADA’S TAX TREATIES         1747

Article 21 (Other Income)
Canada does not follow the OECD rule in dealing with the taxation of
items of income not dealt with in the preceding articles of the convention.
Under article 21(1) of the model, such items of income are taxable only
in the state of residence. Canada follows the UN model when dealing with
both developed and developing countries, and reserves to the state of
source the right to tax according to the law of the state of source, limiting
only the rate of source state taxation for income from an estate or trust to
15 percent on the gross amount of the income, provided that the income
is also taxable in the contracting state in which the beneficial owner is a
resident. Canada does not include article 21(2) of the OECD model treaty,
probably on the ground that it is unnecessary because Canada reserves
the right to impose taxation at source. It should be noted, however, that
the UN model also preserves in article 21 the right to impose taxation at
source and continues to include article 21(2), following the same wording
as the OECD model. In the OECD and the UN models, article 21(2)
extends, as the commentary clarifies, to income that arises in one of the
contracting states or in a third state but is attributable to a right or
property that is effectively connected with a permanent establishment or
a fixed base in one of the contracting states, giving that state a right to
tax the income under article 7 or 14, as the case may be. Canada
presumably considers this article redundant in cases where the treaty
preserves the right to tax other income in the state in which it arises.
Where the income arises in a third state, Canada’s article 21 seems to
give the exclusive right to tax that income to the state of residence of the
recipient, probably even in the case where it arises in respect of a right or
property effectively connected with a permanent establishment in the
other contracting state.

Article 22 (Capital)
Generally, Canada does not depart from the OECD model other than in
minor wording changes and changes consistent with other changes from
the model that Canada adopts in its treaties. Specifically, Canada corrects
the misuse of the word “enterprise” in article 22(2) and substitutes the
word “resident.” In article 22(3), Canada deletes the reference to “boats
engaged in inland waterways transport” and gives the exclusive right to
tax capital of ships and aircraft and movable property thereto operated in
international traffic to the contracting state of residence of the operator. 51

Articles 23A and 23B (Methods for Elimination of
Double Taxation)
Canada, along with most other countries that provide for credit or exemp-
tion by internal law, does not adopt the OECD model treaty provisions to
provide credit or exemption. In respect of foreign tax credits, Canada


   51 See also the discussion above concerning article 2 (taxes covered) and reference to
taxes on capital.

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1748    CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

provides that double taxation will be avoided by deducting from Cana-
dian tax payable on profits, income, or gains arising in the other contracting
state the tax payable in the other contracting state on such profits, in-
come, or gains. This deduction is “subject to the existing provisions of
the law of Canada regarding the deduction from tax payable in Canada of
tax paid in a territory outside Canada and to any subsequent modification
of those provisions—which shall affect the general principle hereof.”
Therefore, Canada, in substance, freeze-frames the foreign tax credit pro-
visions of the Income Tax Act as they exist at the time the convention is
brought into force. However, Canada adds, probably as a redundancy, that
Canadian taxpayers will be entitled to any greater deduction or relief that
may be provided under Canadian laws, presumably provided after the
date of bringing into force the convention.
   Canada also freeze-frames the existing provisions of the law of Canada
regarding exempt surplus of a foreign affiliate, and allows in computing
Canadian tax of a company resident in Canada a deduction in computing
taxable income of any dividend received by it out of exempt surplus of a
foreign affiliate that is a resident of the other contracting state.
   Canada, however, shows considerable flexibility in dealing with devel-
oping countries. In one treaty, 52 Canada seems to provide an unlimited
credit for both business income tax and non-business income tax, with the
limitation on the credit being the Canadian tax on the same income com-
puted before the tax credit and on the assumption that the Brazilian tax
on dividends does not exceed 25 percent of the gross and, on interest and
royalties, 20 percent of the gross. In most other treaties with developing
countries, 53 Canada allows for tax sparing in providing for tax credits for
income sourced in developing countries which, by virtue of incentive
legislation of the developing country, is not subject to the full rate of
source taxation under local law. Tax sparing for developing countries was
endorsed in the UN commentary to article 23 of the UN model:
   It is of primary importance to developing countries to ensure that the tax
   incentives measures [of those countries] shall not be made ineffective by
   the taxation in the capital-exporting countries which use the foreign tax
   credit system resulting inadvertently in the cancellation of benefits de-
   signed to stimulate investment to the advantage of the treasuries of the
   capital-exporting countries. This undesirable result is to some extent avoided
   in bi-lateral treaties through the “tax sparing” credit, by which a developed
   country grants a credit not only for the tax paid but for the tax spared by
   incentive legislation in the developing country.
Canada generally follows this recommendation when dealing with devel-
oping countries.


   52 That with Brazil.
   53See, for example, the treaties with Argentina, Bangladesh, Barbados, Cameroon,
Dominican Republic, Egypt, Guyana, India, Indonesia, Ivory Coast, Jamaica, Kenya, Ko-
rea, Malaysia, Malta, Morocco, Pakistan, Papua New Guinea, Philippines, Romania,
Singapore, Spain, Thailand, and Tunisia.

(1995), Vol. 43, No. 5 / no 5
                                                       CANADA’S TAX TREATIES         1749

   Canada accepts a wide variety of provisions to be included in its trea-
ties pursuant to which the other contracting state will provide credits or
exemptions to residents of that state in respect of Canadian tax payable.
   Canada always adds an interesting provision to article 23 stating that,
for the purposes of that article, profits, income, or gains of a resident of
a contracting state which may be taxed in the other contracting state in
accordance with the convention shall be deemed to arise from sources in
that other state.54 It should be noted, however, that the addition of this
paragraph to article 23 is not unique to Canadian treaties. In fact, it has
become of widespread use, but for some reason has not yet been adopted
by the OECD in its model.

Article 24 (Non-Discrimination)
The OECD in article 24(1), which states the basic rule that nationals of
one contracting state will not be subject to any taxation or connected
requirement that is other or more burdensome than taxation and con-
nected requirements to which nationals of the other state in the same
circumstances may be subjected, adds, in respect of the same circum-
stances, the words “in particular with respect to residence.” These words
were added with the publication of the OECD model in 1992, but have not
yet been picked up by Canada in its treaty practices. The OECD also
extends the benefits of article 24(1) to persons who are not residents of
one or both of the contracting states. Canada does not do this.55
   In article 24(2), the OECD model provides that a stateless person who
is a resident of one contracting state will not be subjected in the other to
any taxation or connected requirement that is other or more burdensome
than those to which nationals of the state concerned in the same circum-
stances may be subjected. Canada does not include such a provision in its
treaties.
   Article 24(3) of the OECD model provides that taxation on a permanent
establishment will not be less favourably levied by the state of the perma-
nent establishment than the taxation levied on enterprises of that state
carrying on the same activities. Canada frequently repeats this rule, but
invariably in article 10 (dividends) overrides the rule allowing for the
imposition of the branch tax, thereby making an important exception to
the general rule.

    54 Presumably, in determining whether the profits, income, or gains of a resident of
Canada are taxable in the other contracting state in accordance with the provisions of the
convention, Canada would recognize that the other contracting state is entitled, under
article 3(2) of the treaty, to apply its own internal law definitions of undefined terms.
Canada, when deciding whether the other contracting state has taxed in accordance with
the convention, should not substitute its own definitions of such terms. See Jean-Marc
Déry and David A. Ward, “Canada,” in International Fiscal Association, Cahiers de droit
fiscal international, vol. 78a, Interpretation of Double Taxation Conventions (Deventer,
the Netherlands: Kluwer, 1993), 259-89, at 281.
    55 In fact, Canada (along with Australia and New Zealand) reserves its position on
article 24 of the OECD model: see paragraph 64 of the OECD commentary to article 24.

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1750   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

   Article 24(4) of the OECD model provides that, except where the
related-party provisions of article 9, 11, or 12 apply, interest, royalties,
and other disbursements paid by an enterprise of one state to a resident of
the other shall, for the purposes of determining taxable profits of the
enterprise, be deductible under the same conditions as if they had been
paid to a resident of the first-mentioned state. The OECD also includes a
rule that debts of an enterprise of one state to a resident of the other shall,
for the purposes of determining taxable capital of the enterprise, be de-
ductible under the same conditions as if they had been contracted to a
resident of the first-mentioned state. Canada does not include this para-
graph in its tax treaties, probably because Canada’s thin capitalization
rules, contained in subsections 18(4) to (8) of the Income Tax Act, apply
only in respect of interest payable to non-residents of Canada.
   Article 24(5) of the OECD model provides that enterprises of the con-
tracting state, the capital of which is wholly or partly owned or controlled
by one or more residents of the other state, will not be subject in the first
state to any taxation or connected requirements that are other or more
burdensome than taxation and connected requirements to which similar
enterprises of the first-mentioned state are or may be subjected. Canada
makes an important alteration to this provision by stating that the taxa-
tion and connected requirements will not be other or more burdensome
than taxation or connected requirements of companies the capital of which
is wholly or partly owned or controlled directly or indirectly by one or
more residents of a third state.56
   The OECD in article 24(6) provides that the benefit of the non-
discrimination article will apply to taxes of every kind and description,
not just the taxes mentioned in article 2. Canada does not adopt this
provision, and normally states that the article will apply only to taxes that
are the subject of the treaty.

Article 25 (Mutual Agreement Procedure)
Under article 25(1) of the OECD model, where a person believes that
actions of one or both states result, or will result, in taxation not in
accordance with the convention, he may “present his case to the compe-
tent authority of the Contracting State of which he is a resident, or if his
case comes under paragraph 1 of Article 24, to that of the Contracting
State of which he is a national.” Canada normally clarifies this by stating
that the person is to “address to the competent authority of the contract-
ing state of which he is a resident an application in writing stating the
grounds for claiming the revision of such taxation.” Canada does not
contemplate the person addressing his application to a contracting state of
which he is a national. The OECD model provides that the case must be
presented within three years from the first notification of action resulting


   56 This, of course, allows Canada to discriminate against foreign-owned or foreign-
controlled companies with such tax benefits as the small business deduction.

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                                                        CANADA’S TAX TREATIES          1751

in taxation not in accordance with the convention. Canada usually pro-
vides that the application is to be submitted within two years.57
   Article 25(2) of the OECD model states that the competent authority
shall endeavour, if the application is justified and if it is not able to arrive
at a satisfactory solution, to resolve the case by mutual agreement with
the other contracting state with a view to the avoidance of taxation “not
in accordance with the Convention.” With some minor wording changes,
Canada adopts this rule. The OECD, however, states that the agreement
reached will be implemented notwithstanding any time limits in the do-
mestic law of the contracting state. Canada does not adopt that provision;
instead, in a separate paragraph, it states that a contracting state will not,
after the expiration of the time limits provided in its national laws, and in
any case after five years from the end of the taxable period in which the
income concerned has accrued, increase the tax base of a resident of
either of the contracting states by including in it items of income that
have also been charged to tax in the other state. Canada normally pro-
vides that this limitation will not apply in the case of fraud, wilful default,
or neglect.58
   Article 25(4) of the OECD model states that the competent authorities
may communicate with each other directly for the purposes of reaching
agreement. Canada states this more broadly and authorizes the direct com-
munication “for the purposes of applying the Convention.” The OECD
model goes on to provide that where it seems advisable in order to reach
agreement to have an oral exchange of opinions, such exchange may take
place through a commission consisting of representatives of the compe-
tent authorities of the contracting states.59 Canada does not usually include
that sentence.

Article 26 (Exchange of Information)
Canada makes a small change to the OECD wording authorizing the ex-
change of information. OECD article 26(1) provides that information so
exchanged shall be treated as secret in the same manner as information
obtained under domestic laws. Canada limits that to require that the infor-
mation be treated as secret only if the information communicated is “secret”
information.

    57 Because Canada requires the aggrieved taxpayer to address to the competent author-
ity an application in writing stating the grounds for claiming the revision to taxation, it
may not be possible within two years of first notification to know exactly what the com-
plaint is that should be addressed to the competent authority or even whether an adjustment
to income or tax will be made by one of the contracting states within two years of first
notification. Presumably, the treaty should be interpreted in such a way that the limitation
period would not start to run until such time as the taxpayer has sufficient information to
address his application to the competent authority in the manner and with the particulars
that Canada normally requires.
    58 For some reason these provisions are also included by Canada in article 9.
    59 This provision was clarified in 1995, but the text was not available at the time of
writing.

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1752   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

Article 27 (Members of Diplomatic Missions and
Consular Posts)
Article 27 of the OECD model merely provides that nothing in the model
shall affect the fiscal privileges of members of diplomatic missions or
consular posts under the general rules of international law or under the
provisions of special agreements. Canada provides a much more detailed
article dealing with this subject matter. It repeats the OECD rule but adds
two more paragraphs. First, it provides that, notwithstanding the provi-
sions of article 4 (residence), a member of a diplomatic mission, consular
post, or permanent mission of one contracting state that is situate in the
other or in a third state shall be deemed to be a resident of the sending
state if, in accordance with the general rules of international law, he is
entitled to the fiscal privileges applicable to such members in the receiv-
ing state and he is liable in the sending state to the same obligations in
relation to tax on his total income as are residents of that sending state.
Canada also adds a provision that the convention will not apply to inter-
national organizations, to organs or officials thereof, and to persons who
are members of a diplomatic mission, consular post, or permanent mis-
sion of a third state or groups of states present in a contracting state and
who are not liable in either contracting state to the same obligations in
relation to tax on their total income as are residents thereof.60

Article 28 (Territorial Extension and Miscellaneous Rules)
OECD article 28 deals with contemplated extensions of the convention to
states or territories for whose international relations one of the contract-
ing states becomes responsible. Canada does not include this OECD article
in its treaties. Canada does, however, define its geographic territory with
particularity in article 3 (definitions). Instead of adopting the OECD model
provisions dealing with territorial extensions, Canada, in article 28, nor-
mally provides a series of miscellaneous rules. The first rule is that the
convention will not be construed to restrict in any manner any exemption,
allowance, credit, or other deduction accorded by the laws of a state in
determining the tax imposed by that state or by any other agreement
entered into by that state. The second rule is that nothing in the conven-
tion is to be construed as preventing Canada from imposing tax on foreign
accrual property income included in the income of the resident of Canada
according to section 91 of the Income Tax Act. 61


    60 Such a provision was suggested by the OECD in paragraph 3 of the commentary to
article 27.
    61 It may be thought that the reasoning of the UK Court of Appeal in Padmore v. IRC,
[1989] STC 493, in the absence of a specific treaty rule, could be applied to FAPI as it
represents an item of income of a resident of one contracting state (that is, the corporation
earning the FAPI), which, if it does not arise in the other contracting state, can be taxed
only in the state of residence of the foreign affiliate and not in the state of residence of the
shareholder of the corporation under article 21 (other income). Section 6.2 of the Income Tax
Conventions Interpretation Act, supra footnote 24, effectively overrides Padmore in relation
to partnerships, but not in relation to corporations that are foreign affiliates and FAPI.

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                                                       CANADA’S TAX TREATIES         1753

Article 29 (Final Provisions)
In the final provisions article, Canada usually sets out the entry-into-
force rules applicable to the particular treaty.

Article 30 (Termination)
Canada adds article 30 to provide for the possible termination of the
treaty. The generally adopted rule is that the treaty will continue indefi-
nitely, with either state being entitled on or before June 30 in a calendar
year commencing after the expiration of five years from its entry into
force to give notice of termination, which will have effect in respect of
tax withheld at source on or after January 1 next following and in respect
of other tax on or after January 1 next following.

POSSIBLE FUTURE DEVELOPMENTS
Generally speaking, one is either very bold or a fool to forecast future
developments of Canadian income tax law, the changes to which are both
fundamental and frequent. Future developments in tax treaty policies may
be somewhat easier to forecast. Working party 1 of the Committee on
Fiscal Affairs of the OECD is actively considering many of the articles
and the related commentary to the OECD model. Undoubtedly, this work
will result in changes to the model, and Canada will probably adopt many
or most of such changes.62 If one is asked, as I have been, to guess the
future direction of Canada’s income tax treaty policy, apart from adopting
changes in the model, perhaps the best place to look is the 1980 Canada-US
tax convention as amended by the various protocols to date. Looking at
that document, and ignoring the unique features of that treaty which re-
flect particular provisions of the internal tax law of the United States
which, obviously, would be inappropriate in other treaties, one might
speculate about changes to Canada’s as yet unpublished models.

Current Work of the OECD
At the time of writing, working party 1 of the Committee on Fiscal Af-
fairs of the OECD is considering further changes to the model. 63 It has
been stated that changes and clarifications to the text of article 2 (taxes
covered) and its commentary appear likely. One of the issues being con-
sidered is the exclusion of payroll taxes from coverage in article 2 and
the exhaustive or illustrative nature of the list of taxes in paragraph (3).
The OECD has said that the commentary may be modified to reflect the
possibility of omitting paragraphs (1) and (2) of article 2 from a treaty, as
this is a practice that is now followed by some member countries.



   62 Part IV of the mission statement, supra footnote 20, outlined those areas being
studied at the time of writing.
   63 These are discussed in a background paper to seminar A, “The OECD Model Treaty—
1995 and Beyond,” conducted by the International Fiscal Association at its annual congress
held in Cannes in 1995.

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1754   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

   The OECD has said that a conflict or difference of view between two
parties to a tax treaty over how the treaty applies to a particular taxpayer,
transaction, or item of income frequently arises when the domestic laws
of the two states are inconsistent with each other, and article 3(2) leads to
the application of different definitions of terms not defined in the conven-
tion. Some member countries have apparently, on a bilateral basis, adopted
broad general solutions to these conflicts of qualifications, and working
party 1 is considering whether such a rule should be included in the model.
   Working party 1 has established a working group to look at a variety
of issues arising under article 5 (the definition of permanent establishment).
The group is discussing the precise meaning of the word “fixed” as used
in article 5, and is considering what sorts of business operations qualify
as a “place of business” and how to interpret the rules governing building
sites and construction or installation projects, including those dealing with
income from supervisory or consulting services. Working party 1 is also
considering the nature of “preparatory or auxiliary” activities, and the
problems arising from the agency paragraphs in the definition of a perma-
nent establishment—in particular, the determination of the question whether
an agent is a dependent or an independent agent of the principal.
   Working party 1 is also considering whether article 6 (income from
immovable property) should be amended to extend to holding companies
that hold immovable property. If a change were made to article 6 to allow
the taxation of capital gains on the sale of shares of property holding
companies, a comparable amendment would be made to article 13. This
change would not affect Canada, because Canada already includes these
kinds of provisions in its treaties.
   Working party 1 is also considering the rates of withholding tax pro-
vided in the OECD model on dividends and interest to determine whether
the rates still reflect the common practice among member countries. Pre-
sumably, if the rates are no longer reflective of current practice, the model
might be amended. As Canada has only recently brought its developed
country treaty rates of withholding taxes on dividends and interest into
line with the OECD model, it is not known whether Canada would further
reduce these rates if the OECD model rates were reduced.
   As previously stated, the OECD, in the 1995 amendments to the model,
clarified the concept of beneficial ownership for the purposes of articles
10 (dividends) and 11 (interest). It is now considering a similar change
for the purposes of article 12 (royalties). It is also considering a proposal
to add a source rule to article 12 similar to that contained in the model for
interest in article 11(5). Such a change would not affect Canadian trea-
ties, because Canada already provides a source rule in article 12.
   The OECD is also considering clarifications or amendments to the com-
mentary on article 12 (royalties) dealing with computer software, and
whether article 13 (capital gains) and article 22 (capital) need to be amended
to ensure that the treaty benefits are properly allocated when income is
derived from ships and aircraft that are not operated by the owner.

(1995), Vol. 43, No. 5 / no 5
                                                         CANADA’S TAX TREATIES          1755

   A new working group has been established by working party 1 to
examine issues arising under article 14 (independent personal services).
An initial question to be considered by this new group is whether there is
still a need for article 14 in the model, or whether income from independ-
ent personal services should simply be taxed as business profits under
article 7.
   Working party 1 is considering a clarification to article 15 (dependent
personal services) to make it clear that income paid in kind is included.
Articles 16 (directors’ fees) and 19 (government service) are also being
considered for clarification in this respect. A number of problems in the
interpretation of article 15 may be dealt with in revised commentaries.
   The working party 1 is also considering how paragraph (2) of article
17 (artistes and sportsmen) applies to so-called star companies that are
organized in a country that is different from the country of residence of
the artiste or sportsman and the place where the activities are exercised.
   A working group has also been set up to study issues under article 18
(pensions). It has sent out a lengthy questionnaire to the OECD member
countries to determine how pensions are taxed under domestic law and
what provisions are contained in bilateral tax conventions. After this in-
formation has been received and studied, there may be some amendments
to article 18 of the model.
   Working party 1 is looking at the fundamental question whether article
19 (government service) still performs a useful function in the model
treaty.
   Working party 1 is considering providing some clarification as to what
constitutes “enterprises . . . carrying on the same activities” within para-
graph (3) of article 24 (non-discrimination). The problem has arisen
because courts in some member countries have arrived at differing inter-
pretations of this concept.
   A new working group has been set up to study the difficult question of
the application of the model treaty to partnerships and other fiscally trans-
parent entities.
   Before looking at the Canada- US tax convention, one point should be
made about the controversial article 3(2). This provision, of course, states
that unless the context otherwise requires, undefined terms shall have the
meaning they have in the tax law of the contracting state applying the
convention. Apart from the Mexican treaty to which reference has already
been made, Canada has shown no propensity to depart from the OECD
model in the language adopted in article 3(2).64 Since the passage of the
Income Tax Conventions Interpretation Act in 1985 and its subsequent


    64 Although not published at time of writing, the 1995 changes to the OECD model
amend article 3(2) so that it expressly refers to the law in force when the treaty is applied.
The change also allows the meaning of terms in non-tax law to be used, but if that is
different from the tax law meaning, the tax law meaning of undefined terms is to be used.

                                                                 (1995), Vol. 43, No. 5 / no 5
1756   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

amendments, several undefined tax treaty terms are intended by Canada
to have the meaning set out in that statute, not the meaning that the terms
have under the Income Tax Act. It is to be hoped that Canada would say
so, in the future, in article 3(2) of its treaties.65

Canada-US Treaty Provisions
It is likely that article 4(1) may be altered in future treaties to add “place
of incorporation” to the OECD tests of domicile, residence, place of man-
agement, or any other criterion of a similar nature used in determining
residence. It is also likely that, in the future, Canada will add to the
definition of a resident a trust, organization or other arrangement that is
operated exclusively to administer or provide pension, retirement, and
employee benefits and not-for-profit organizations. These entities, which
are generally exempt from tax in the state in which they are constituted,
may not meet the OECD definition of residence, and therefore may not
gain the benefit of the treaty in respect of reduced withholding taxes on
investment income and protection against tax on business income in the
absence of a permanent establishment without expanding the definition of
a resident of a contracting state.
    One might also see the more widespread use, in the permanent estab-
lishment definition of article 5, of a reference to the use of an installation
or drilling rig or ship to explore for or exploit natural resources if such
use is for more than a minimum period (in the Canada-US tax convention,
3 months) in any 12-month period.
    It is also possible that Canada may treat with more particularity the
right to tax shipping and air transport profits. For example, the Canada-US
tax convention includes:
      (a) the extension of the article to gains from the alienation of ships,
   aircraft and containers used principally in international traffic; and
      (b) a definition of profits from the operation of ships and aircraft in
   international traffic to include rental of ships or aircraft, profits from the
   use, maintenance or rental of containers used in international traffic and
   rental of aircraft, ships or containers provided that the profits from such
   rentals are incidental to the profits referred to in (a) or (b).
   Because of Canada’s lack of a contiguous land border with other coun-
tries, it is not likely that the provisions of article 8 of the Canada-US tax
convention dealing with railway rolling stock, motor vehicles, and high-
way transport would be included generally in Canada’s other treaties.
   One might speculate that in the future there may be a more widespread
exemption from withholding tax (1) for interest paid by a resident of one
state to the other contracting state or to a political subdivision of that


   65 The provisions of the Income Tax Conventions Interpretation Act, supra footnote 24,
do not allow for the use of meanings in Canadian law, other than those in the Income Tax
Act. Canada, therefore, could not adopt the 1995 OECD wording of article 3(2) without
amending the Income Tax Conventions Interpretation Act.

(1995), Vol. 43, No. 5 / no 5
                                               CANADA’S TAX TREATIES         1757

state; (2) for interest paid by or guaranteed or ensured by that one con-
tracting state or by a political subdivision to a resident of the other; and
(3) for interest paid on indebtedness arising as a consequence of the sale
on credit by a resident of one state of equipment, merchandise, or serv-
ices to a resident of the other state.
    It is also fair to assume that Canada will clarify in future treaties that
royalties paid for the use of computer software will be exempt from
withholding tax at source. In accordance with its recent announcement,
Canada will also exempt from withholding tax payments for the use of or
the right to use any patent or information concerning industrial, commer-
cial, or scientific experience (other than information provided under rental
or franchise agreements).
    It is also likely that future treaties may find provisions in them that
reflect the provisions in the Canada-US tax convention that allow an
individual who is taxed by one of the contracting states on a gain from
the alienation of property, but who defers tax in the other state under its
domestic law, to elect to be liable for tax in the other state in that year as
if the taxpayer had sold and repurchased the property at fair market value
at that time.
    To tighten the taxation of residents of one state who perform independ-
ent personal services in the other (including entertainers and athletes or
sportsmen), the Canada-US tax convention authorizes a withholding tax
at source not exceeding 10 percent. Such a provision might conceivably
become part of Canada’s unpublished models.
    It is to be hoped that in the future Canada will also make more wide-
spread use of the provision contained in the Canada- US tax convention
exempting charitable organizations and tax-exempt pension plans from
withholding tax on dividends and interest paid by residents of the other
contracting state. It is also to be hoped that the provisions in the Canada-US
tax convention for the deduction of cross-border charitable donations will
have more widespread use, and that Canada will agree to apply its some-
what limited non-discrimination article to all taxes, not just the taxes that
are the subject of the particular income tax convention.
    The Canada-US tax convention now contains a provision for one con-
tracting state to collect taxes owing to the other state from its residents,
with certain limitations and protections. Provisions for mutual assistance
in the collection of taxes have long been an objective in model conven-
tions going back to the League of Nations models and carried forward
with the OECD, as well as with the European Communities. Canada, hav-
ing broken the ice with the Canada-US tax convention, might be expected
to use this kind of provision more frequently in the future.
    It is not to be expected that Canada will follow the US convention in
setting out detailed rules to counteract treaty shopping of the kind under-
taken by the United States for its protection under the Canada-US tax
convention. As noted in the technical explanation to the fourth amending
protocol, Canada takes the position that it has the right to apply anti-abuse

                                                      (1995), Vol. 43, No. 5 / no 5
1758   CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE

rules to counteract treaty shopping. The use of such provisions has been
recognized by the OECD in its commentaries to the model treaty; it may
be that Canada, in the future, will expressly say so in the treaty text.66
   A particularly pressing problem existed between Canada and the United
States concerning the US estate tax imposed on residents of Canada who
died with property situate in the United States. Because this problem was
not widespread with other countries, one would not anticipate that other
treaties will permit the kind of integration between estate taxes and capi-
tal gains taxes found in article XXIX( B) of the Canada-US tax convention.




    66 In at least one recent treaty Canada added, under the miscellaneous rules, an interest-
ing provision that the treaty would not apply to any company, trust, or partnership that is
a resident of one state and is beneficially owned or controlled directly or indirectly by one
or more persons who are not residents of that state if the amount of the tax imposed on the
income or capital of the company, trust, or partnership by that state is substantially lower
than would have been imposed if all the shares or all the interests, as the case may be,
were beneficially owned by one or more individuals who were residents of that state. See
article 29(3) of the Agreement Between Canada and the Republic of Zimbabwe for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income, Capital and Capital Gains, signed at Bulawayo on April 28, 1992.

(1995), Vol. 43, No. 5 / no 5

								
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