Case information

Taxation — Income tax — International tax treaties — Beneficial ownership — Whether Tax Court erred in holding that dividend recipients were not beneficial owners of dividend — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 212(2), 215(6) — Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, Can.T.S. 2000 No. 22, art. 10(2)(a).

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The applicant is a corporation resident in Canada. In 2003, it declared a large dividend (the “Dividend”). Three of the applicant’s shareholders, who together control more than 70% of the applicant, are corporations resident in Barbados. Each of these shareholders loaned, under the terms of a standard form Securities Lending Agreement, its shares of the applicant to a Luxembourg corporation (collectively, the “Luxcos”) which, on a date after payment of the Dividend, returned the shares to the corresponding Barbados corporation, along with the gross Dividend. The Luxcos sought and obtained a ruling from the Luxembourg tax authorities that they were mere conduits for the Dividends and therefore not the owners of the Dividends. Under this ruling, the Luxcos paid no tax on the Dividends in Luxembourg. The Income Tax Act requires corporations to withhold the tax payable on any dividend when paying that dividend to a non-resident of Canada. The applicable withholding tax rate is 15% for dividends paid to Barbados residents under the Canada-Barbados tax treaty, 5% for Luxembourg residents under the Canada-Luxembourg tax treaty, and 25% in the absence of a tax treaty. The applicant withheld and remitted 5% of the Dividends as tax. The Minister of National Revenue took the position that the Barbados corporations were the beneficial owners of the shares and that the applicable withholding rate was therefore 15%. The Minister assessed the applicant for failing to withhold the correct amount. The applicant appealed the assessment to the Tax Court.

The Tax Court found that the Luxcos assumed no risk in relation to the Dividends and did not receive them for their own use and enjoyment, holding that the Luxcos were not the beneficial owners of the Dividends. It dismissed the applicant’s appeal. The Federal Court of Appeal dismissed an appeal, finding that the Tax Court made no error in its determination of beneficial ownership.