How To Interpret A Tax Treaty – Guidance From A Canadian Tax Lawyer – Tax Authorities

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What is a tax treaty

A tax treaty is a bilateral agreement between two countries to resolve specific tax issues such as double taxation, pension treatment, or determination of residency status for tax purposes. They often list special circumstances or exceptions, such as: B. Taxation of income from one country in another country. Because Canada has signed a number of tax treaties with other countries, this article focuses on the interpretative approaches to a tax treaty.

The Vienna Convention

The Vienna Convention has been signed by many countries and applies to all conventions, not just tax conventions. Article 31(1) of the Vienna Convention sets out the basic rule for the interpretation of all conventions, including tax conventions:

  • A contract shall be interpreted in good faith in accordance with the ordinary meaning accorded to the terms of the contract in their context and in light of its object and purpose.

In addition, Article 32 of the Vienna Convention considers supplemental materials for the interpretation of a tax treaty to confirm the meaning established under Article 31. Although the approach envisaged in Articles 31(1) and 32 sounds intuitive, they can support almost any type of interpretive approach due to the vagueness of the wording. Therefore, the Vienna Convention offers little practical guidance in determining the appropriate meaning of specific treaty provisions.

UN and OECD model

Canada has signed tax treaties with more than 60 countries, and most of these treaties are based on the United Nations Double Taxation Convention between Developed and Developing Countries (United Nations Model Convention) and the Model Tax Convention of the Organization for Economic Co-operation and Development Convention on Income and Capital (OECD -Model).

The UN and OECD Model Conventions and Commentaries provide more meaningful and practical guidance in relation to tax treaties based on the UN and OECD Models and there is an internal rule of interpretation in Article 3(2) of the UN and OECD Models. Sample Agreement:

  • With respect to the application at all times by a Contracting State of the Convention, any term not defined therein shall, unless the context otherwise requires, have the meaning it has at that time under the law of that State for tax purposes to which the Convention applies, any meaning under the applicable tax laws of that state superseding any meaning given to the term under other laws of that state.

This provision essentially envisages a three-step process:

  1. Does the contract define the term?

  2. If the treaty does not provide a definition, what is the domestic meaning (not necessarily the domestic law definition) of the term?

  3. Does the context of the treaty require a meaning other than domestic?

The definition of a particular term in a tax treaty may be inclusive or exclusive, but it may contain undefined terms. In this case, Article 3(2) of the UN and OECD Conventions for determining the ordinary meaning under domestic law applies. However, an undefined term may still be undefined under domestic law or have more than one meaning under a country’s general domestic and tax laws. In the latter circumstances, meaning under domestic tax law should take precedence over meaning under other domestic laws. Additionally, the context of the contract must be considered to determine the meaning of an undefined term, and an alternative meaning of the term may be more appropriate. This analysis should include the following factors:

  • The ordinary meaning of the term compared to the meaning under domestic law;

  • The meaning of the term under the tax law of the other country;

  • The purpose of the relevant contractual provision; and

  • Foreign material such as comments.

Professional Tax Tips – Consult an experienced Canadian tax attorney for help interpreting tax treaties

To date, there has not been a comprehensive assessment of national courts’ approach to interpreting tax treaties. However, Klaus Vogel’s review of tax treaty cases for the period 2000 to 2008 from a small sample of countries shows that the courts made fundamental mistakes. Unfortunately, since there is no easy answer to how to interpret a tax treaty, a taxpayer should always seek advice from an experienced Canadian tax attorney in Toronto if they need help interpreting a tax treaty.


What is a tax treaty?

A double tax treaty is an agreement between two countries to regulate tax issues such as double taxation and tax evasion. A tax treaty usually sets out the taxes to be paid and helps decide which country an individual is considered a resident.

What is the OECD Model Convention

That OECD Model Convention, a model for countries entering into bilateral tax treaties, plays a crucial role in removing tax barriers to cross-border trade and investment. It is the basis for the negotiation and application of bilateral tax treaties between countries, designed to support businesses while helping to prevent tax evasion and avoidance. The OECD model also offers a means of harmonizing the most common problems that arise in the area of ​​international double taxation.

The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.


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