In 2006, the headlines read: “U.K. Decision Challenges Rule Against Treaty Shopping”[i]; “Germany to Tighten Anti-Treaty Shopping Rules”[ii]; “Belgium Rewrites Anti-avoidance Rules”[iii]; “Taxpayer prevails in Canadian Treaty Shopping Case”[iv]; “U.K. Struggles to Define Avoidance Schemes”[v]. The headlines are ominous, desperate and yet at times reassuring. But is the story being told a story of a real or perceived crisis?
At the Canadian Tax Foundation Conference in September 2004, the CRA General Anti-avoidance Rule (“GAAR”) Committee reported that as at July 31, 2004, the Committee had reviewed 620 GAAR cases.[vi] General treaty issues or treaty shopping was not mentioned in a summary of the issues that were addressed.[vii] However, by June 30, 2005 the CRA reported that a total of 628 cases had been referred to the GAAR Committee and now the specific laundry list of GAAR cases included treaty issues and, specifically, treaty shopping.[viii] At some point between the 2004 and 2005 report the GAAR Committee either decided that treaty shopping was more of a priority or, as the CRA would likely argue, that adding treaty issues to the list simply clarified their position.[ix] Regardless of which rationale you subscribe to, it is clear that treaty shopping is a major concern to tax authorities globally. In response, tax authorities are scrambling to find ways to counteract this behaviour. Canada provides its courts with the authority to apply domestic provisions such as GAAR to treaties to challenge treaty shopping. However, this procedure is unpredictable, the rules are not transparent and the decision makers are not completely impartial. When treaty shopping first became an issue of concern, it may have been that review of disputes by the Canadian courts was the best solution at the time, but transactions and international relations are now more complex. It’s time to make a change.
This paper will review the application of the general anti-avoidance rule to Canadian treaties. In particular, the paper will look at how GAAR is applied to treaty shopping arrangements and review the current approach to resolving disputes about the application of GAAR in these situations. It will then look at the challenges faced by the courts in applying GAAR in order to make a recommendation about how the dispute resolution process can be improved.
[i] Nikhil V. Mehta and Kate Habershon, “UK Decision Challenges Rule Against Treaty Shopping” (2006) vol. 44, no. 7 Tax Notes International, 1.
[ii] Nicola Selack and Christian Ehlermann, “Germany to Tighten Anti-Treaty Shopping Rules” (2006) vol. 43, no. 4 Tax Notes International 282.
[iii] Mark Quaghebeur, “Belgium Rewrites Anti-avoidance Rules” vol. 43, no. 6 Tax Notes International 449.
[iv] Ian J. Gamble, “Taxpayer Prevails in Treaty Shopping Case” vol. 43, no. 10 Tax Notes International 803.
[v] Trevor Johnson, UK Struggles to Define Avoidance Schemes” vol. 43, no. 6 Tax Notes International 497.
[vi] This figure tracks GAAR cases since it was introduced into legislation.
[vii] See Canada Revenue Agency, Technical News No. 32, July 15, 2005 at 7.
[viii] Patrick Boyle and Jules Lewy, “2005 Canadian Tax Foundation Annual Conference CRA Roundtable General Anti-Avoidance Rule GAAR Committee,” Tax Topics, no. 1754 (North York, ON: CCH Canadian, October 20, 2005) 1-9 at 5.
[ix] The government has always argued that GAAR applies to treaties, although, there was nothing included in legislation to support this position. When an amendment was introduced in the Income Tax Convention Interpretation Act (R.S.C. 1985, c. I-4, as amended) the government’s position was that it was introduced as a “clarification” as opposed to a change in law. This will be discussed in more detail later in the paper.
The above excerpt is taken from my University of Waterloo Masters of Taxation Thesis submitted on April 23, 2007 to Professor Robin MacKnight. Please submit an email request for the copy of the paper.