Blakes Slides for Canadian Luncheon

Tax Executives Institute –
Dallas Chapter
U.S./Canada Tax Update – March 12, 2013
Update on International Tax Cases from
Canada/Commonwealth Countries
Kathleen Penny
Blake, Cassels & Graydon LLP
[email protected]
Foreign Entity Classification Cases
• Basic approach to foreign (including U.S.)
entity classification taken by Canadian and
U.K. courts
• R. v. Sommerer (2012, Canadian Federal
Court of Appeal)
– Austrian foundation classified as trust for
Canadian tax purposes
Foreign Entity Classification Cases
• HMRC v. Anson (2013, U.K. Court of Appeal)
– U.S. LLC classified as “opaque” entity, i.e. not “tax
transparent” for U.K. tax purposes (even though was
“tax transparent” for U.S. tax purposes)
– result was that U.K. resident who was member of U.S.
LLC did not get foreign tax credit in U.K. or double tax
relief under U.K./U.S. treaty, for U.S. federal and state
tax paid in U.S. on his share of LLC’s profits (resulting in
total effective tax rate of 67%)
– similar issue in Canada where Canadian resident
individual is member of U.S. LLC
Foreign Entity Residence Case
• Canadian resident person/entity subject to Canadian tax
on worldwide income/gains (subject to any treaty
relief/foreign tax credits)
• Garron Family Trust (2012, Supreme Court of Canada)
– trust with Barbados trustee (and formed under Barbados
– residence of trust not necessarily = residence of trustee
– residence of trust is where central management and
control take place
– similar to corporate residency test based on place of
central management and control
Classification and Residence of U.S.
Entities for Canadian Tax Purposes
• U.S. “per se” corporation (“C” or “S”) = corporation for Canadian tax
– U.S. residence only due to treaty “tie-breaker” rule
• U.S. limited liability company (LLC) = corporation for Canadian tax
– Canada/U.S. tax treaty status
– residence for Canadian tax purposes based on place of management
and control if not a corporation for U.S. tax purposes
• U.S. general or limited partnership = partnership for Canadian tax
• U.S. trust = true trust for Canadian tax purposes (unless “bare” trust)
– Canada/U.S. tax treaty status of U.S. grantor trust
“Beneficial Ownership” Cases
• Velcro Canada Inc. (2012, Tax Court of Canada)
– Netherlands licensor found to have “beneficial ownership” of
royalties paid by Canadian taxpayer
– back-to-back licenses (Canada/Netherlands and
Netherlands/Netherlands Antilles) but no automatic passing
through of royalties and other favourable facts
– not under appeal
• HMRC v. Anson (2013, U.K. Court of Appeal)
– not really a “beneficial ownership” case, but note that LLC’s
profits treated as belonging to LLC and not its members, in spite
of automatic allocation provisions
Tax Treaty Interpretation, and Impact of
Retroactive Domestic Tax Legislation
• Sanofi Pasteur Holding SA (2013, India High Court)
– sale (in 2009) by French taxpayer of shares of French
corporation, sole assets of which were shares of Indian
– retroactive legislation passed by India to reverse results of
Vodafone decision was applied, and this was upheld by court
– however, court applied exemption under India/France tax treaty
– French taxpayer did not derive gain from the alienation of shares
in an India resident company, was not the legal or beneficial
owner of shares of underlying Indian companies
– court stated that “see through” approach would be a “strained
construction” of treaty provisions
Other Important Canadian Cases in
• GlaxoSmithKline Inc.(2012, Supreme Court of Canada
– pharmaceutical company transfer pricing case
– license agreement with one non-Canadian affiliate and
purchases of active ingredients from another non-Canadian
– case still ongoing
• Daishowa-Marubeni International Ltd. (pending in 2013,
Supreme Court of Canada)
– important case re: Canadian tax treatment of contingent
liabilities, possible impact on handling of contingent liabilities in
M&A, real estate and resource transactions
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