A McGill University professor is attempting a first by seeking to intervene as a third party in a tax treaty “shopping” case brought before the Federal Court of Appeal. Her interpretation of the dispute between the Crown and an oil company could, according to the tax law professor, help improve the Canadian, as well as the international, tax system.
In 2003, Canadian oil company Husky, then one of the largest companies in the country’s hydrocarbon sector, temporarily transferred shares from Barbados to Luxembourg to benefit from the tax treaty there, to their advantage, and thus save more than $30 million in Canadian taxes.
An example of “tax shopping”, i.e. the implementation of a strategy to use a more profitable tax treaty.
“The parties will try to ‘shop’ for a tax treaty that is the most advantageous,” simplifies Raphaël Clément, lawyer and representative of McGill professor Allison Christians, also director of the Canadian Tax Policy Centre. The Centre is a non-profit organization whose objective is to defend tax policy issues in Canada in a non-partisan manner.
At the trial in January 2023, the Tax Court of Canada ruled in favour of the government, acknowledging that Husky and its Barbados companies were not entitled to reduce their taxes in this way. The latter appealed, hoping that the Federal Court of Appeal would disagree with the trial judge’s view.
For the Canadian Tax Policy Centre, this case could have significant effects on the tax system in Canada, but also on the jurisprudence of other countries in this area.
“There are a lot of technical rules and a lot of documents that were put together to allow this to happen, and now the court has to decide whether it was done correctly or not,” Allison Christians said in an interview with the Duty. And we think that is not the case.”
” Never seen “
The professor filed a motion to intervene on July 5 with the aim of appearing in court in Toronto to assert her expertise, explain her arguments and answer questions.
Beyond international tax law, the question is also whether “people from the academic field, professors, should have the right to appear in court to present arguments in a tax case,” says Mr.e Raphael Clément: That is what is, in fact, unprecedented in this request.
The interest of the Canadian Tax Policy Centre is to come and put forward in Court the notion of beneficial owner, that is to say the person who can actually benefit from the dividend, and to demonstrate how Canadian law and tax treaties work together as a whole.
Me Clement points out that there is a reason why Canada negotiated different rates with Luxembourg, Barbados and other countries.
When Canada negotiates with a country, “it actually expects that money [y] “really go,” the lawyer continues.
What you have here is a taxpayer who managed to pay only $16 million in taxes by having someone else pay for him.
Under the tax treaty negotiated between Canada and Barbados, taxpayers would have had to pay 15% Canadian tax on the $328 million dividend they were owed in 2003, reports Me Clement. That’s about $49 million.
However, by temporarily transferring its shares to Luxembourg, Husky instead had this dividend taxed at a rate of 5%, under the convention signed with Canada.
” Brief, [ils se sont] imposed at 5% rather than 15, [ils ont] saved 10%, which represents almost $33 million in Canada,” summarizes the lawyer.
Once the dividend was sent to Barbados, the company returned its shares there a few weeks later.
“The argument here is to say that the companies in Luxembourg were not the ones who truly enjoyed the dividend, as was immediately referred to in Barbados,” he notes.
“What you have here is a taxpayer who has managed to pay only $16 million in taxes by having someone else pay for him,” Christians said. “And that’s not something we should be able to do easily.”
More than a private dispute
The Crown responded favourably to Professor Christians’ application, while the three parties, namely Husky and the two companies in Barbados, opposed it. They argued, among other things, that the Centre’s intervention would create an imbalance in the proceedings.
“We are in front of three law firms […] who have a lot of experience in tax law, states Mr.e Clement: It would be difficult to say that this really creates a balance problem on this side.
Husky and the Barbadian companies also argue that this is a private dispute between the Crown and the other parties.
“We are saying that it is more than that, in fact,” maintains the lawyer, who also thinks that this case “has an impact on many other cases, potentially, and on the tax system in general.”
Contacted by The dutya Husky attorney responded that the company “does not comment on ongoing legal matters.”
The Canadian Tax Policy Centre had until July 19 to file its response, which it did. The process, which could take a few weeks, is now ongoing until the judge responds.