Category Archives: Tax Treaties

Maximum Tax Credit Under Income Tax Treaties – Sas Ansari

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Maximum Tax Credit Under Income Tax Treaties

Société générale valeurs mobilières inc. v. The Queen, 2016 TCC 131

This was a Rule 58 application to determine whether the maximum tax credit Canada is liable to grant under the Canada-Brazil tax treaty, referred to by the words “[t]he deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil” is calculated on the basis of net or gross income from Brazil.  In other words, do the expenses incurred to earn the income have to be taken into account in determining the Canadian tax otherwise payable as a reference point for the maximum credit?


The interpretation of treaties is governed by the Vienna Convention on the Law of Treaties.  Canada is a signatory to this convention.  Article 31(1) provides that “A treaty shall by interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its objects and purpose”.  Further, the Income Tax Conventions Interpretation Act, section 3 provides that an undefined term in a treaty has the same meaning as it has for purposes of the Income Tax Act, unless the context otherwise requires.  The ITA meaning is not that at the time of the making of the treaty, but the meaning as amended from time to time. The Supreme Court of Canada stated that the goal of interpreting a treaty is finding “the meaning of the words in question. This process involves looking to the language used and the intention of the parties” – Crown Forest Industries Ltd.v. Canada,  [1995] 2 S.C.R. 802, at para. 22.

The parties agreed to the meaning of portions of the sentence in dispute:

  • “income tax as computed before the deduction is given” means the taxpayer’s Canadian income tax computed before the foreign tax credit is applied; and
  • “income which may be taxed in Brazil” is a reference to the income Brazil is entitled to tax under the treaty.

The Court considered the English, French, and Portuguese versions of the treaty.  Each language version is equally authoritative and they all are held to have the same meaning.   The TCC held that the meaning of “appropriate” in this case refers to a correspondence or logical connection between that part of the Canadian tax to be allowed as a credit and the Brazilian bond income (para 31).  The steps to be followed in determining the maximum tax credit are:

  • Compute the Canadian income tax payable by the taxpayer before the foreign tax credit is given;
    • The computation of Canadian income tax otherwise payable is according to the Income Tax Act;
  • Identify what portion of the Canadian income tax computed relates to the Brazilian income.

The foreign tax credit amount is limited to the actual Canadian tax the taxpayer would otherwise pay on the foreign income (para 34). Where the Canadian tax under the Income Tax Act is on a net basis, the tax otherwise payable is also determined by taking into account deductible expenses.

The Court distinguished the gross basis income decisions of the Supreme Court of Canada in Interprovincial Pipe Line Company v. MNR, [1959] S.C.R. 763, decided in 1959 and Interprovincial Pipe Line Company v. MNR, [1968] S.C.R. 498, because at that time the ITA did not require taxpayers to compute their income from different sources separately.  The ITA was amended after that to provide that a taxpayer’s income from each source was to be calculated on a separate basis and that deductions, where reasonably applicable to such sources, were assumed to have been computed in computing the income from that source – See ITA subsection 4(1).  Subsection 4(1) sets out the test for determining which expense is relevant to income from a source in a particular place.

The Court recognized that this treaty contained a tax sparing provisions, but did not agree that the tax sparing provisions was meant to allow for a Canadian tax credit in excess of the taxes otherwise payable on the Brazilian source income.  The maximum tax deemed paid by on the income is determined by the tax sparing provision.  However, the tax credit in Canada is limited by the income tax otherwise payable on that income according to Canadian rules.  This way, the tax incentives offered in Brazil are not impacted by Canada taxing the amount of income subject to the incentive.

This interpretation is also supported by the OECD Model Convention and its Commentaries.  The credit is for the Canadian taxes actually paid and not credit for all of the Brazilian taxes paid or deemed paid (para 63).

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Judicial Review of CRA decision in MAP Process – Sas Ansari

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Judicial Review of CRA decision in MAP Process

CGI Holding LLC v Canada (National Revenue), 2016 FC 1086

The Federal Court was asked to conduct a Judicial Review of the conduct of the Canada Revenue Agency throughout the Mutual Agreement Procedure profess under a tax treaty.  The Applicant argued that the CRA failed to or refused to fully inform itself of the issue alive in the MAP process, that its procedural rights were not respected during the MAP process, and sought mandamus forcing the Minister to issue a NOA under the ITA so that it can have recourse to the Tax Court of Canada.

The Court held that it had jurisdiction to review the conduct of the CRA during a Mutual Agreement Procedure process.


The Applicant is an LLC created under the laws of Delaware. It received a dividend payment from its related Canadian resident corporation in 2007 as a result of a reorganization.  The Canadian resident payor withheld and remitted 25% of the dividend based on CRA’s interpretation of subsection 212(2).  The 2010 Tax Court of Canada decision in TD Securities (USA) LLC v The Queen, 2010 TCC 186, caused the CRA to change its position on withholding tax requirements for dividends paid to an LLC where the US-Canada tax treaty applies (2010-0369271C6).  The Applicant argued that, on the basis of the TD Securities decisions, the withholding rate should have been 5% not 25% and is seeking a refund of the overpaid amounts. The CRA distinguished the two cases.

in 2012, the Applicant applied to the CRA for a refund, but the CRA denied the request because the 2 year limitation period in subsection 227(6) had expired.  The Applicant asked the IRS to engage the Mutual Agreement Procedure, but the competent authorities were unable to reach an agreement.


The FC characterised the review as the Applicant reviewing the position of the CRA of its lack of entitlement to a refund because of the difference in facts between its case and that in the TD Securities decision. In the TD Securities decision, the disregarded LLC was taxable in the US on its worldwide income through its member and, an entity that is fully and comprehensively taxed in the contracting state, is entitled to treaty benefits even if the taxation occurs at the shareholder, member, or partner level.  This doesn’t mean that every LLC is automatically entitled to treaty benefits.

The Court stated that administrative actions of the Minister, even in the context of the MAP process, are subject to  judicial review – Hupacasath First Nation v Canada (Minister of Foreign Affairs), 2015 FCA 4Teletech Canada, Inc v Canada (National Revenue), 2013 FC 572Robert Julien Family Delaware Dynasty Trust v Canada (National Revenue), 2007 FC 1071. The success or failure of the MAP process involves a decision by the CRA (para 44).  This decision is what is subject to review.

The Court does have to show appropriate deference to the role of the Minister and the prerogative powers exercised as part of the review – Canada (Prime Minister) v Khadr, 2010 SCC 3 at para 46.  The FC held that the appropriate standard of review is reasonableness as the MAP procedure gives the Minister a broad margin of appreciation (paras 48-49) – Canada (Attorney General) v Boogaard, 2015 FCA 150 at para 64.  A court can only intervene if the decision is one that falls outside the range of possible, acceptable outcomes defensible in respect of the facts and the law – Dunsmuir v New Brunswick, 2008 SCC 9 at para 47.

Here, the CRA considered the facts, considered that there was a possible tax avoidance motive to the reorganization giving rise to the dividend, was not convinced that the dividend was fully taxable in the US, and considered these in light of the TD Securities decision. The FC held that the decision was reasonable.

Procedural fairness

The Court also addressed the procedural protections owed to a taxpayer in the MAP process, which the taxpayer is not a participant.  The type and extent of procedural rights depend on the relevant circumstances of the decision – Baker v Canada (Minister of Citizenship and Immigration), [1999] 2 SCR 817. The CRA had the obligation to deal fairly with the taxpayer and consider the taxpayer’s submissions which includes being satisfied that the taxpayer is aware of the CRA’s concerns.  The taxpayer should have notice of the concerns and have an opportunity to make submissions.

Mandamus remedy

Where the Minister is asked to exercise a discretion and does not, mandamus may lie to have the minister exercise that discretion.  However, the request for the exercise must be made and the minister must refuse or the time passed must imply refusal to exercise the discretion before mandamus can be ordered.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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