Canada moves to curtail treaty shopping 

August 22: Foreign-based multinationals and foreign corporations investing in or through Canada will want to closely follow developments as Canada kicks off formal consultations on possible measures to combat “treaty shopping” abuses and the related erosion of the country’s tax base.

As signaled in Canada’s 2013 federal budget, the Department of Finance in an August 2013 release issued a 25-page discussion paper—Consultation Paper on Treaty Shopping - The Problem and Possible Solutions.

Finance Canada has begun a four-month consultation period for interested parties to provide input by 13 December 2013 before it decides on a course of action.

Treaty shopping defined

The paper describes treaty shopping as an abuse that arises when a non-resident of Canada (who is not entitled to the benefits of a tax treaty with Canada) seeks to obtain the benefits of one of Canada’s treaties by indirectly using an entity resident in another country with which Canada does have a treaty to earn income through Canada. These treaty shopping techniques provide “indirect and unintended tax benefits to residents of third countries.”

The consultation paper:

  • Defines treaty shopping, describes its detrimental effects on Canada, and proposes possible solutions
  • Solicits comments from interested parties to help develop an effective anti-treaty-shopping rule to protect the integrity of Canada’s bilateral tax treaties.

Finance Canada is seeking a tax policy approach that will provide effectiveness, certainty and simplicity for taxpayers and ease of administration for the Canada Revenue Agency.

Finance Canada also wants to determine an appropriate degree of precision to adequately prevent treaty shopping abuses without going too far and undermining Canada’s treaty network and creating a barrier to foreign investment in Canada.

Read an August 2013 report prepared by the KPMG member firm in Canada: Canada Moves to Curtail Treaty Shopping

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