Tax Treaty Case: Prevost Car Inc. v. The Queen, 2008 TCC 231By Robert Robillard - 15 December 2014
This blogpost originally appeared on rbrt.ca.
 The issue in these appeals by Prévost Car Inc. (“Prévost”), is to determine who was the beneficial owner of dividends paid by Prévost in 1996, 1997, 1998, 1999 and 2001. The term “beneficial owner” is found in Article 10, paragraph 2 of the Canada-Netherlands Tax Treaty (“Tax Treaty”).[Convention Between Canada and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income] Prévost is a resident Canadian corporation who declared and paid dividends to its shareholder Prévost Holding B.V. (“PHB.V.”), a corporation resident in the Netherlands. The Minister of National Revenue (“Minister”) issued assessments under Part XIII of the Income Tax Act (“Act”) against Prévost, notices which are dated July 13, 2000, August 29, 2001 and April 15, 2004, in respect of the aforementioned dividends.[note omitted] The Minister assessed on the basis that the beneficial owners of the dividends were the corporate shareholders of PHB.V., a resident of the United Kingdom and a resident of Sweden, and not PHB.V. itself. When Prévost paid the dividends it withheld tax by virtue of subsections 212(1) and 215(1) of the Act. According to Article 10 of the Tax Treaty, the rate of withholding tax was five percent.[note omitted]  In her replies to the notices of appeal the respondent stated that pursuant to subsection 215(1) of the Act, the appellant was required to withhold and remit to the Crown 25 percent of the dividends paid to PHB.V. but, she adds, facetiously, I might add, “fortunately for the appellant, the Minister applied the reduced rates of taxation of 15 and 10% from the Canada-Sweden Tax Treaty and Canada‑U.K. Tax Treaty respectively to the dividends paid even though the treaties had no application […]  In both the common law and the civil law, the persons who ultimately receive the income are the owners of the income property. It may well be, as respondent’s counsel argues, that when the terms “beneficial owner”, “beneficially owned” or “beneficial ownership” are used in the Act, it is either used in conjunction with property, such as shares or some other property but is never used in conjunction with the income which is derived from the property. i.e., dividends from shares. However, dividends, whether coin or something else, are in and by themselves also property and are owned by someone. Section 12 of the Act includes in computing income of a taxpayer for a taxation year income from property, including amounts of dividends received in the year. The taxpayer required to include the amount of dividends in income is usually the person who is the owner − the beneficial owner − of the dividends, except, for example, when the Act deems another person to have received the dividend or requires a trust to include the dividend in its income. The words “beneficial owner” in plain ordinary language used in conjunction with dividends is not something alien.  In my view the “beneficial owner” of dividends is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received. The person who is beneficial owner of the dividend is the person who enjoys and assumes all the attributes of ownership. In short the dividend is for the owner’s own benefit and this person is not accountable to anyone for how he or she deals with the dividend income. When the Supreme Court in Jodrey stated that the “beneficial owner” is one who can “ultimately” exercise the rights of ownership in the property, I am confident that the Court did not mean, in using the word “ultimately”, to strip away the corporate veil so that the shareholders of a corporation are the beneficial owners of its assets, including income earned by the corporation. The word “ultimately” refers to the recipient of the dividend who is the true owner of the dividend, a person who could do with the dividend what he or she desires. It is the true owner of property who is the beneficial owner of the property. Where an agency or mandate exists or the property is in the name of a nominee, one looks to find on whose behalf the agent or mandatary is acting or for whom the nominee has lent his or her name. When corporate entities are concerned, one does not pierce the corporate veil unless the corporation is a conduit for another person and has absolutely no discretion as to the use or application of funds put through it as conduit, or has agreed to act on someone else’s behalf pursuant to that person’s instructions without any right to do other than what that person instructs it, for example, a stockbroker who is the registered owner of the shares it holds for clients. This is not the relationship between PHB.V. and its shareholders.  What we have at bar is a Canadian corporation, Prévost, paying dividends to its sole shareholder, PHB.V., a Dutch corporation. There is evidence that Prévost’s minute book contains reference to Henlys and Volvo being its shareholders and there are reported references by Ms. Bissonnette that Henlys wanted its dividends. These errors are not fatal to the appellant’s case. Minute books do contain errors. And it is not uncommon that the principals of corporations, rather than the shareholders, are erroneously referred to as the owners of the corporation.  There is no evidence that PHB.V. was a conduit for Volvo and Henlys. It is true that PHB.V. had no physical office or employees in the Netherlands or elsewhere. It also mandated to TIM the transaction of its business as well for TIM to pay interim dividends on its behalf to Volvo and Henlys. However, there is no evidence that the dividends from Prévost were ab initio destined for Volvo and Henlys with PHB.V. as a funnel of flowing dividends from Prévost. The financial statements of PHB.V. for fiscal periods ending on December 31st in each of 1995, 1996 and 1997 and copies of PHB.V.’s corporate income tax returns for 1996, 1997, 1998, 1999 and 2000 reflect that PHB.V. owned assets and had liabilities. For Volvo and Henlys to obtain dividends, the directors of PHB.V. had to declare interim dividends and subsequently shareholders had to approve the dividend. There was no predetermined or automatic flow of funds to Volvo and Henlys even though Henlys’ representatives were trying to expedite the process.  PHB.V. was a statutory entity carrying on business operations and corporate activity in accordance with the Dutch law under which it was constituted. PHB.V. was not party to the Shareholders’ Agreement; neither Henlys nor Volvo could take action against PHB.V. for failure to follow the dividend policy described in the Shareholders’ Agreement. Henlys may have a cause of action against Volvo and Volvo a cause of action against Henlys under the Shareholders’ Agreement if the dividend policy was not carried out. But neither would have a bona fide action in law under the Shareholders’ Agreement against a person not a party to that agreement, that is, PHB.V. Volvo and Henlys, of course, may have action against PHB.V. if PHB.V. did not repay monies advanced as loans by them, but such action would be taken as creditors of PHB.V., not shareholders.  Article 24 of PHB.V.’s Deed of Incorporation does not obligate it to pay any dividend to its shareholders. The directors of PHB.V. are to duly observe what has been agreed to in the Shareholders’ Agreement concerning reserving part of its accrued profits. Article 24, paragraph 2 of the Deed provides that any profits remaining after the reservation of part of the accrued profits shall be at the disposal of the general meeting. I cannot find any obligation in law requiring PHB.V. to pay dividends to its shareholders on a basis determined by the Shareholders’ Agreement. When PHB.V. decides to pay dividends it must pay the dividends in accordance with Dutch law.  PHB.V. was the registered owner of Prévost shares. It paid for the shares. It owned the shares for itself. When dividends are received by PHB.V. in respect of shares it owns, the dividends are the property of PHB.V. Until such time as the management board declares an interim dividend and the dividend is approved by the shareholders, the monies represented by the dividend continue to be property of, and is owned solely by, PHB.V. The dividends are an asset of PHB.V. and are available to its creditors, if any. No other person other than PHB.V. has an interest in the dividends received from Prévost. PHB.V. can use the dividends as it wishes and is not accountable to its shareholders except by virtue of the laws of the Netherlands. Volvo and Henlys only obtain a right to dividends that are properly declared and paid by PHB.V. itself, notwithstanding that the payment of the dividend has been mandated to TIM. Any amount paid by PHB.V. to Henlys and Volvo before a dividend was properly declared and paid, as I see it, was a loan from PHB.V. to its shareholders. This, too, is not uncommon. There is a practice in Canada of corporations advancing funds to its shareholders without a declaration of dividend. At the end of the fiscal year, the corporation’s directors determine whether the funds are to remain a loan or be “adjusted” to a dividend, with the proper directors’ resolutions. This practice, I understand, is accepted by the fisc. […]  The assessments will be vacated. Volvo and Henlys were not the beneficial owners of the dividends paid by Prévost. I have not heard any evidence satisfying me that PHB.V. was a conduit for Volvo and Henlys. The appeals are allowed, with costs. At the conclusion of the trial appellant’s counsel requested submissions be made with respect to costs following the issue of these reasons. If either counsel still wishes to make submissions he should get in touch with the Registrar of the Court to advise whether he and opposing counsel wish to make oral or written submissions and suggest deadlines for the submissions.”.
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