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).
After finding that Husky was liable under s. 215(6) for not having withheld at the non-Treaty rate of 25%, Owen J went on to consider the GAAR assessments of the successors to the Barbcos for the difference between the 15% withholding tax they would have borne without the securities loans, and the claimed rate of withholding at the 5% rate.
As to whether there were avoidance transactions, he rejected submissions that the transactions were carried out primarily to avoid the risk of Barbados tax on the dividends, and found that the purpose of the arrangements was primarily to reduce Part XIII tax.
The transactions were not an abuse, because they did not reduce Part XIII tax, and instead increased the rate from 15% to 25%. However, if for completeness, one assumed that the conditions for the 5% rate under the Barbados Treaty had been satisfied, then under this hypothesis there would appear to be no abuse. He stated (at paras. 376, 416):
Given the absence of any rule in Article 10 or elsewhere in the Luxembourg Treaty to supplement the residence requirement, the beneficial owner requirement, and the voting requirement, it is reasonable to conclude that Canada and Luxembourg were satisfied with the protection against “conduits” and flow-through arrangements afforded by the inclusion in Article 10(2) of those requirements. In other words, the true intentions of Canada and Luxembourg are fully reflected in the scope of the concepts of residence, beneficial owner and voting power adopted in Article 10(2). …
Consistent with the theory of economic allegiance described by the majority in Alta Energy, which recognizes that a recipient of passive income need not have any allegiance to the paying country, the focus of the rationale of Article 10(2) is not how the common shares of Husky came to be owned by the Luxcos, but whether the Luxcos satisfy the residence requirement, the beneficial owner requirement and the voting power requirement.