Art, 10(8) of the Canada-U.K. Convention provides:
The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.
The day before a dividend was paid to it by a Canadian-resident corporation, a UK corporation undertook transactions to ensure that it owned shares giving it control of 10% of the total votes of the Canadian corporation, and claimed the reduced rate of 5% pursuant to Art. 10(2) of the Treaty.
After reviewing the history of Art. 10(8) (in particular, the expansion of the purpose test in 2003) and the OECD Commentaries, the Directorate concluded that “the intention of both Canada and the UK [was] that paragraph 8 of Article 10 of the Treaty not be limited to situations where the degree of connection of the ultimate dividend recipient with Canada is questioned,” i.e., it was not limited to situations of treaty-shopping.
The Directorate also concluded that application of Art. 10(8) would result in the UK corporation being subject to a withholding rate of 25% (on the basis of denying any benefits under Art. 10), rather than the rate being 15% on the basis of only the benefit of Art. 10(8)(a) being denied.
The Directorate also stated:
Consideration was given to whether paragraph 8 of Article 10 of the Treaty could apply only to dividends paid on a particular tranche of shares (i.e. the initial acquisition of shares or a subsequent acquisition of shares resulting in 10% beneficial ownership, either directly or indirectly). We are of the view that would not be supported by the language of the provision as the determination of whether it is paragraph 2(a) or 2(b) of Article 10 of the Treaty that applies to a dividend is conditional on the percentage of votes controlled directly or indirectly by the beneficial owner of the dividend and paragraph 8 of that Article denies the benefit of the applicable paragraph.