The federal government initiated a consultation Monday on possible ways to deal with the problem of tax treaty shopping.
The Department of Finance published a consultation paper that examines the issue of treaty shopping — non-resident taxpayers that seek preferential tax treatment by using an entity resident in a country that has a treaty with Canada to earn income in Canada — which the government says that it views as an abuse of Canada’s income tax treaties.
“When treaty shopping occurs, tax treaties concluded between Canada and its treaty partners provide indirect and unintended tax benefits to residents of third countries,” it says. “While Canada is prepared to reduce the level of Canadian tax imposed on residents of trading partners by concluding bilateral tax treaties, it is not prepared to extend these tax treaty benefits to third-country residents who indirectly access these benefits by treaty shopping.”
The paper notes that efforts to curb treaty shopping in the courts have largely been unsuccessful. As a result, it suggests that legislative changes are necessary. “Adopting measures that prevent treaty shopping, as some other countries have done, would protect the integrity of Canada’s tax treaties,” it says.
“There are a wide range of approaches to preventing treaty shopping,” it says, adding that one basic issue is whether treaty shopping rules should be included in domestic tax laws or in tax treaties; and, whether here should be a general anti-treaty shopping rule or a more specific rule. ” Each approach has pros and cons and, as a practical matter, it may be necessary to combine different approaches and types of rules,” it says.
The deadline for the consultation is December 13.