Before a Canadian public corporation (“Husky”) paid a dividend on its shares, two significant shareholders of Husky resident in Barbados (the “Barbcos”) transferred their shares under securities lending agreements to companies resident in Luxembourg with which they did not deal at arm’s length (the “Luxcos”). On payment to the Luxcos of the dividends on those shares, Husky withheld at the Luxembourg treaty-reduced rate of 5% (based on the Luxcos being the beneficial owners of the dividends and controlling at least 10% of the voting power in Husky).
Owen J found that Husky was liable under s. 215(6) for not having withheld at the non-Treaty rate of 25% (although he had no power to increase the assessment of the Minister, which had imposed tax based on the Barbados Treaty-reduced rate of 15%). S. 212(2) imposed tax at 25% on the basis of the persons to whom the dividends had in fact been paid (the Luxcos). Since the dividends had not been paid to Barbados residents (the Barbcos), the Barbados treaty rate of 15% was unavailable. In this regard, Owen J stated (at paras. 239-240, 243):
The position of the Respondent that [the Barbcos] were the beneficial owners of the Dividends fails to recognize that the liability for tax under subsection 212(2) of the ITA does not rest on beneficial ownership. Only the relieving provisions in Article 10 of the Luxembourg Treaty … and Article X of the Barbados Treaty … addressing dividends … raise the issue of beneficial ownership.
Consistent with the words of subsection 212(2) read in their entire context and in their grammatical and ordinary sense, the Articles each contain a basic requirement that a company resident in one of the contracting states has “paid” a “dividend” to a resident of the other contracting state. If that basic fact does not exist, the Articles do not apply to a dividend. ...
[T]he clear and unambiguous requirement in the text of subsection 212(2) [is] that a non-resident is liable for Part XIII tax under that subsection only if a corporation resident in Canada pays or credits (or is deemed to pay or credit) an amount as, on account or in lieu of payment of, or in satisfaction of, a dividend to that non-resident person.
Furthermore, the Luxembourg Treaty rate was unavailable because the Luxcos were not the beneficial owners of the dividends, given that they were required to make matching dividend compensation payments to the Barbcos.