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Public International Law - Tax Treaties

. Canada v. Alta Energy Luxembourg S.A.R.L.

In Canada v. Alta Energy Luxembourg S.A.R.L. (SCC, 2021) the Supreme Court of Canada reviewed treaty law, in the context of a tax treaty:
(1) General Principles

[34] In R. v. Melford Developments Inc., 1982 CanLII 201 (SCC), [1982] 2 S.C.R. 504, at p. 513, this Court applied the principle that tax treaties do not themselves levy new taxes, they simply authorize the contracting parties to do so. Reciprocity is a fundamental principle underlying tax treaties, as they confer rights and impose obligations on each of the contracting states. Hogan J. observed that “[p]arties to a tax treaty are presumed to know the other country’s tax system when they negotiate a tax treaty; they are presumed to know the tax consequences of a tax treaty when they negotiate amendments to that treaty” (para. 84). This only makes sense.

[35] The objective of tax treaties, broadly stated, is to govern the interactions between national tax laws in order to facilitate cross-border trade and investment. One of the most important operational goals is the elimination of double taxation, where the same source of income is taxed by two or more states without any relief. If left unchecked, double taxation risks creating barriers to international trade and investment, which are vital in a globalized economy. Thus, many substantive provisions of the OECD Model Treaty, a model for numerous bilateral tax treaties, are directed to achieving this goal and resolving conflicting claims between residence-based taxation and source-based taxation.

[36] Another important consideration is the dual nature — contractual and statutory — of tax treaties. Consideration of the contractual element is crucial to the application of the GAAR because it focuses the analysis on whether the particular tax planning strategy is consistent with the compromises reached by the contracting states. As noted by international tax law scholars Jinyan Li and Arthur Cockfield:
Whether the particular outcome of tax planning is defensible may depend on the understanding of the “bargain” struck by the two treaty partner countries. Every dispute involving the application of a tax treaty needs to ask the question of whether and how one treaty partner can dispute or should be allowed to upset the “bargain” struck in its own national interest that inheres in the treaty “contract”. Despite the offence that one treaty partner may take, in retrospect, to how a treaty provision is applied, the question remains: Might the particular outcome be one that the other treaty partner foresaw or reflect the “contractual intention” of the other treaty partner? After all, the “bargain” was entered into by the parties out of mutual self-interest. This is particularly relevant in applying general anti‑avoidance rules. [Emphasis added.]

(J. Li and A. Cockfield, with J. S. Wilkie, International Taxation in Canada: Principles and Practices (4th ed. 2018), at p. 376)
[37] As tax treaties are treaties, their interpretation is governed by the Vienna Convention on the Law of Treaties, Can. T.S. 1980 No. 37 (“Vienna Convention”), but the methodology prescribed is not radically different from the modern principle applicable to domestic statutes in Canada — that is, one must consider the ordinary meaning of the text in its context and in light of its purpose (art. 31(1) of the Vienna Convention; Crown Forest Industries Ltd. v. Canada, 1995 CanLII 103 (SCC), [1995] 2 S.C.R. 802, at para. 43; Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536, at p. 578). However, unlike statutes, treaties must be interpreted “with a view to implementing the true intentions of the parties” (J. N. Gladden Estate v. The Queen, [1985] 1 C.T.C. 163 (F.C.T.D.), at p. 166, quoted approvingly in Crown Forest, at para. 43). The national self-interest of each contracting state must be reconciled in the interpretive process in order to give full effect to the bargain codified by the treaty. This principle applies with equal force where a court is engaged in the process of ascertaining a treaty’s “object, spirit, and purpose” as part of the GAAR framework.

(2) OECD Commentaries as Interpretative Aids

[38] Article 31 of the Vienna Convention permits courts to consider contextual factors such as other agreements and instruments made by parties in connection with a treaty. In my view, the OECD Model Treaty and its Commentaries are relevant to the interpretation of treaties based on that model. The introduction to the OECD Model Treaty indicates that the Commentaries “can . . . be of great assistance in the application and interpretation of the conventions and, in particular, in the settlement of any disputes”, and this Court has affirmed the “high persuasive value” of the OECD Model Treaty and its Commentaries (“Introduction” to the OECD Model Treaty (1998, 2003 and 2017), at para. 29; Crown Forest, at para. 55; see also D. A. Ward, “Principles To Be Applied in Interpreting Tax Treaties” (1977), 25 Can. Tax J. 263, at p. 268). However, the relevance of Commentaries released subsequent to the signing of a treaty is disputed (see, e.g., “Introduction” to the OECD Model Treaty (1998, 2003 and 2017), at para. 35; MIL (TCC), at para. 83; Cudd Pressure Control Inc. v. R., 1998 CanLII 8590 (FCA), [1999] 1 C.T.C. 1 (F.C.A.), at para. 28, per McDonald J.A.; SA Andritz, No. 233894, Conseil d’État (Section du Contentieux), December 30, 2003 (France); Li and Cockfield, at p. 57).

[39] In the instant case, the Minister relies on revisions to the Commentaries on the OECD Model Treaty that were published in 2003 and 2017, several years after Canada and Luxembourg negotiated the Treaty. In the 2003 Commentaries, treaty shopping is characterized as an abuse of the concept of residence, whereas previous Commentaries published at the time the Treaty was signed were silent on this question. A revision to the 2017 Commentaries, made in connection with the addition of a new art. 29 to the OECD Model Treaty, provides that legal residency alone is not an automatic entitlement to all benefits under a tax treaty.

[40] While revisions to the Commentaries are relevant to tax treaty interpretation, the key issue is the weight that they should receive. Although some scholars submit that the OECD has a tendency of revising the Commentaries too often and too dramatically, thereby sometimes diverging from the original intentions of the parties, I am not prepared to reject all subsequent Commentaries as interpretative aids (see Li and Cockfield, at p. 57; P. Malherbe, Elements of International Income Taxation (2015), at pp. 49-50). I instead prefer the nuanced approach adopted by the Federal Court of Appeal in Prévost Car Inc. v. Canada, 2009 FCA 57, [2010] 2 F.C.R. 65.

[41] Indeed, in Prévost Car, the Federal Court of Appeal held that subsequent Commentaries expanding or clarifying notions already captured by the OECD Model Treaty are relevant, but not those that extend the scope of provisions in a manner that could not have been considered by the drafters (paras. 10-12; see also Li and Cockfield, at p. 57). Thus, while later amendments to the Commentaries are not part of the context as defined in art. 31(2) of the Vienna Convention, given that such amendments were not made “in connexion with the conclusion of the treaty”, they may play a role under art. 31(3), which refers to “[a]ny subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions” and “[a]ny subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation”.

[42] In this case, I am of the view that the 2003 and 2017 Commentaries do not reflect the intentions of the drafters of the Treaty. The extensive revisions made to the Commentaries in 2003 purported to clarify the relationship between tax treaties and domestic anti-avoidance rules, and, in particular, one of the revisions was made to include the prevention of tax avoidance as a purpose of such treaties. The changes were not mere clarifications and have been described as being “created out of thin air by the OECD in 2003” and as “a significant change in the stated attitude of the OECD to the relationship between tax treaties and tax avoidance” (B. J. Arnold, “Tax Treaties and Tax Avoidance: The 2003 Revisions to the Commentary to the OECD Model” (2004), 58 I.B.F.D. Bulletin 244, at pp. 249 and 260).

[43] Using the Federal Court of Appeal’s language in Prévost Car (at para. 12), the 2003 Commentaries do not elicit, but rather contradict, the views previously expressed. When Canada and Luxembourg signed the Treaty in 1999, the applicable Commentaries indicated that anti-abuse measures, to be effective, had to be included in a treaty (“Commentary on Article 1” of the 1998 OECD Model Treaty, at para. 21). Further, they referred to the principle of pacta sunt servanda, which supports the position that where nothing in a treaty speaks directly to fiscal avoidance, there is a strong argument that the treaty partners negotiated the treaty not intending such rules to apply (“Commentary on Article 1” of the 1998 OECD Model Treaty, at paras. 11‑26; D. A. Ward et al., The Interpretation of Income Tax Treaties with Particular Reference to the Commentaries on the OECD Model (2005), at pp. 91‑92).

[44] Moreover, interpreting art. 1 of the Treaty with reference to the 2003 Commentaries would overlook Luxembourg’s registered observation on the “Commentary on Article 1” of the 2003 OECD Model Treaty. That observation reads as follows:
Luxembourg does not share the interpretation in paragraphs 9.2, 22.1 and 23 which provide that there is generally no conflict between anti-abuse provisions of the domestic law of a Contracting State and the provisions of its tax conventions. Absent an express provision in the Convention, Luxembourg therefore believes that a State can only apply its domestic anti-abuse provisions in specific cases after recourse to the mutual agreement procedure. [para. 27.6]
In effect, even if the Minister were able to rely on the Commentaries postdating the Treaty, they would be of no assistance because Luxembourg’s observation expresses disagreement with the “Commentary on Article 1” of the OECD Model Treaty, which includes the anti-abuse commentary (Ward et al., at p. 64; “Commentary on Article 1” of the 2003 OECD Model Treaty, at p. 7).

[45] It follows, then, that in the interpretation of art. 1 of the Treaty, Commentaries on art. 1 of the OECD Model Treaty that postdate the Treaty cannot be relied on to introduce terms that modify the Treaty. Not only would this effectively amend the Treaty in a manner not agreed upon by the parties, but it would also usurp the role of the Governor in Council by allowing for judicial amendment of bilateral treaties against the expressed wishes of the contracting states.
The court continues with a useful and illustrative examination of the Luxembourg-Canada tax treaty from para 52 on.


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Last modified: 03-12-22
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