Concept of ‘Beneficial Owner’ in Tax Treaties — Analysis of Canadian Tax Courts’ decision in case of Prévost Car Inc. v. Her Majesty the Queen, 2008 TCC 231 (Part II)

(iv) The Revenue’s counsel, citing an article by Mr. Mark D.
Brender, submits that there is no settled definition of ‘beneficial ownership’
even under common law, let alone for the purposes of the Act. [Symposium :
Beneficial ownership and the Income-tax Act, supra, at pp. 315-318].
Indeed, Mr. Brender suggests that words or concepts neutral as between the civil
and common laws be used in place of ‘beneficial owner’ or ‘beneficial
ownership’.

(v) The counsel for the Revenue referred to the VCLT, the Tax
Treaty, Model Conventions as well as the Act to suggest how the terms
‘beneficial owner’ and ‘bénéficiaire effectif’ should be interpreted, bearing in
mind that these terms are not defined in the Tax Treaty, Model Conventions and
the Act and have no legal meaning in Quebec civil law jurisdiction. The
respondent’s submission was that these words should not have a technical or
legal meaning, but an interpretation recognised internationally.

(vi) The terms ‘beneficial owner’ and ‘bénéficiaire effectif’,
together with the Dutch term uiteindelijk gerechtigde, appear in the Tax
Treaty and must be given meaning. The words ‘bénéficiaire effectif’ appear
nowhere in the French version of the Act. This may, it is suggested, limit the
scope of Article 3(2) of the Tax Treaty. The term ‘bénéficiaire effectif’ also
does not appear in the Quebec Civil Code. The Revenue’s counsel submits that the
use of the words ‘bénéficiaire effectif’ in the Tax Treaty rather than
‘propriétaire effectif’, which are used in the Act, suggests that Parliament
intended to use the private law of the provinces to complement the Act and the
words are not to be determined by reference to the common law.

(vii) The Revenue also states that while the Tax Treaty
refers to the ‘beneficial owner of the dividends’, the Act never uses such a
phrase. The Act refers to a taxpayer who has income from property, for example,
a dividend received by a taxpayer, and this income is included in the taxpayer’s
income for the year. The phrase is never used in conjunction with the income
which is derived from the property. The Revenue’s counsel submits that the term
‘beneficial owner’ or a similar expression is never used in the Act in the same
context as it is used in the Tax Treaty and Model Convention.

(viii) The Revenue’s counsel declared that when determining
the meaning of an undefined treaty term, Canadian courts have relied on the
meaning relevant to the specific tax provision in respect of which the treaty
applies. Thus, in A.G. of Canada v. Kubicek Estate, the word ‘gain’,
which was not defined in the Canada U.S. Tax Treaty, was given the meaning found
in Ss.40(1) of the Act. The Hoge Raad could not find the meaning of the word
‘present’ in the domestic laws of the Netherlands and therefore held that the
word appearing in tax treaties between the Netherlands and Brazil and the
Netherlands and Nigeria be interpreted in accordance with Articles 31 and 32 of
the VCLT and not the equivalent provisions of Article 3(2) of the Model
Convention.

(ix) The Revenue’s counsel therefore concluded that the terms
‘beneficial owner’ and similar terms in the Act are based on legalistic trust
meanings originating under the laws of equity and ought not to apply to the Tax
Treaty. The words ‘beneficial owner’ and ‘bénéficiaire effectif’ have no meaning
in the Act.

x) The Revenue’s counsel submitted that the phrase ‘beneficial owner’ does not appear in English dictionaries. The words do appear separately, of course. The word ‘beneficial’ in the Canadian Diciionary of the English Language is defined primarily as ‘producing or promoting a favourable result’ or ‘receiving or having the right to receive proceeds or other advantages’. The word ‘beneficial’, counsel states, connotes both a factual (‘receiving’) and legal (‘right to’) meaning. The Shorter Oxford Dictionary (1973) defines ‘beneficial’ as ‘of or pertaining to the usufruct of property; enjoying the usufruct’, usufruct being a civil law concept. In The New Shorter Oxford Dictionary ‘beneficial’ is defined as ‘Of, pertaining to, or having the use of benefit of property, etc.

xi) The Canadian Dictionary defines ‘owner’ as ‘of or belonging to oneself’, ‘to have or possess as. property’, and ‘to have control over’. The word ‘owner’ it states also connotes both a factual (possess, control) and legal (‘belonging’) meaning. The Shorter Oxford defines ‘own’ as one’s own . . . to have or hold as own’s own”. The word ‘owner’ is ‘one who owns or holds something; one who has a rightful claim or title to a thing’.

xii) In the Jodrey Estate, the Supreme Court approved of the meaning given by Hart J., in MacKeen Nova Scotia, who  wrote:

It seems to me that the plain ordinary meaning of the expression ‘beneficial owner’ is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the ‘beneficial owner’ is the one who can ultimately exercise the rights of owner-ship in the property. [Covert v. Nova Scotia (Minister of Finance), [1980] S.c.J. No. 101 (Q.L.), [1980] 2 S.c.R. 774, at p. 784, citing MacKeen Estate v. Nova Scotia, [1977] C.T.C. 230 (NSSC), para. 46].

xiii) The Revenue’s counsel submitted that from a textual reading of the term ‘beneficial owner’, its meaning can be distilled as applying to the person who can exercise the normal incidents of ownership (possession, use, risk, control) and as such ultimately benefits from the income. The ordinary meaning of ‘beneficiaire effectif’ in the French text and uiteindelijk gerechtigde in Dutch share common features with the ordinary meaning of ‘beneficial owner’, but have a significant difference.

xiv) ‘Beneficiaire’ is defined, the counsel submits, consistently as the person who enjoys or takes ad-vantage of a benefit of any kind, including a right or a privilege. Therefore, he submits that ‘beneficiaire’ is clearly not a technical term and does not per se connote a legal right, such as that of ownership.

xv) Therefore, the Revenue’s counsel concluded, the term ‘beneficiaire effectif’ means the person or group that actually and truly enjoys or benefits from an advantage of any kind. Authors have translated the words ‘beneficiaire effectif’ to ‘real beneficiary’, which is a fairly accurate translation as long as the word beneficiary  is not understood in a legal sense.

xvi) The Dutch version of the Convention uses the term uiteindelijk gerechtigde for ‘beneficial owner’. This term, translated back to English, means ‘he who is ultimately entitled’. Professor van Weeghel, notes in his text The Improper Use of Tax Treaties that:

It is unclear why this translation (uiteindelijk gerechtigde) was chosen. The term ‘beneficial owner’ (One who does not have title to property but has rights in the property which are the normal incidents of owning the property’, Black’s Law Dictionary, Fifth Edition) has a closer equivalent in Dutch language and this would be ‘economiscn eigenaar’ a term which has a well understood meaning also in Dutch law.

xvii) However, as the Revenue’s counsel contends, the government of the Kingdom of the Netherlands opted in the Tax Treaty to use a term for ‘beneficial owner’, whose English translation of ‘ultimately entitled’ connotes a factual inquiry, meaning ‘final’ or ‘in the end’. Just as in the French text, there is no reference to ownership in the Dutch text. Uiteindelijk gerechtigde is also consistent with the ordinary meaning given to the term by the Royal Dutch case, supra, in which the uiteindelijk gerechtigde of a dividend is one who can ‘freely avail of the distribution’; being the person ultimately entitled to the benefit of the income.

xviii) The Revenue’s counsel submitted that the plain and ordinary meaning of the terms ‘beneficial owner’, ‘beneficiaire effectif’ and uiteindelijk gerechtigde in the three languages of the text of the Tax Treaty does not suggest that an exclusively legal meaning should be given to the terms. The counsel is of the view that the term ‘beneficiaire effectif’ points strongly to a determination of the true relationship and is inconsistent with a narrow legalistic meaning. The respondent insists that the meaning of each term used in all three versions accommodates only a non-legal meaning. It is this commonality between the three versions which must form the basis for defining the term, he suggests.

(xix) The respondent’s view is that a reconciliation of the three language versions  of the Tax Treaty results in a meaning  that requires  a search behind the legal relationships in order  to identify the person who, as a matter  of fact, can ultimately  benefit from the dividends. The respondent seeks support from a non-tax case before the England  and Wales Court of Appeal that was called upon to interpret  the term ‘beneficial ownership’ within the context of the civil law of Indonesia: Indofood International Ltd. v. JP Morgan Chase  Bank  N.A. London Branch. [2006] E.W.C.A. Civ. 158, S.T.L. 1195. The judge also noted that the Court  of Appeal had  regard  to substance over  form, as required by the  law  of Indonesia (paras.  18 and  24).

xx) The decision in Indofood conflicts somewhat with the opinion the Dutch government and the Hoge Raad in the Royal Dutch case, supra, that a recipient is not the beneficial owner of income only if it is contractually obligated to pay the largest part of the income to a third party. In Indofood, the Court of Appeal did not base its reasoning on contractual obligation to forward the interest, but rather whether the recipient enjoyed the ‘full privilege’ of the interest or if it was simply an ‘administrator of income’.

xxi) The parties agree that PHB.V. was not an agent, trustee or nominee for Volvo and Henlys. Rather, it is the Revenue’s view that PHB.V. was acting as a mere conduit or funnel in favour of Volvo and Henlys upon receiving dividends from Prevost.

xxii) One has to determine what the words ‘beneficial owner’ and ‘beneficiate effectif’ (and the Dutch equivalent) mean in Article 10(2) of the Tax Treaty. Article 3(2) of the Tax Treaty requires one to look to a domestic solution in interpreting ‘beneficial owner’. The OECD Commentaries on the 1977 Model Convention with respect to Article 10(2) are also relevant.

xxiii) The Commentary for Article 10(2) of the Model Convention explains that one should look behind ‘agents and nominees’ to determine who is the beneficial owner. Also, a ‘conduit’ company is not a beneficial owner. In these three examples, the person ‘the agent, nominee and conduit company’ never has any attribute of ownership of the dividend. The ‘beneficial owner’ is another person.

xxiv) In common law, a trustee, for example, holds property for the benefit of someone else. The trustee is the legal owner, but does not personally enjoy the attributes of ownership, possession, use, risk and control. The trustee is holding the property for someone else and that, ultimately, it is that someone else who has the use, risk and control of the property. Also, in common law, one person may have a life interest in property and another may have a remainder interest in the same property. The owner of the life interest receives income from the property and owns the income; the owner of the remainder interest owns the capital of the property. There is no division of property in common law as there is in civil law. The word ‘beneficial’ distinguishes the real or economic owner of the property from the owner who is merely a legal owner, owning the property for someone else’s benefit, i.e., the beneficial owner.

xxv) 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 the 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. S. 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.
 

5. Court’s decision:

i) 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’ exer-cise the rights of ownership in the property, 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 [Radwell Securities Ltd. v. Inland Revenue Commissions, (1968) 1 All E.R. 257]. 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 tru owner of property who is the beneficial owner of Hie 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 ad 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 hold’s for clients. This is not the relationship between PHB.V. and its shareholders.

ii) 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 Netherland 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 Prevost were ab initio destined for Volvo and Henlys with PHB.Y. as a funnel of flowing dividends from Prevost. 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.

iii) PHB.Y. 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.Y., not shareholders.

iv) Article 24 of PHB.Y.’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. The judge could not find any obligation in law requiring PHB.Y. to pay dividends to its shareholders on a basis determined by the Shareholders’ Agreement. When PHB.Y. decides to pay dividends it must pay the dividends in accordance with Dutch law.
 
v) PHB.V. was the registered owner of Prevost 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.Y. 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 person other than PHB.V. has an interest in the dividends received from Prevost. 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, not-withstanding 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.

vi) Accordingly, the Canadian Tax Court held that Volvo and Henlys were not the beneficial owners of the dividends paid by Prevost. There is no evidence satisfying that PHB.Y. was a conduit for Volvo and Henlys. The appeals were allowed, with costs.

Author’s Note:

In the aforesaid Canadian Tax Court decision, the court has discussed in detail the concept of the ‘beneficial owner’ in the context of interpretation of tax treaties. In arriving at its conclusion, the Court has referred to and considered various foreign Court cases, academic articles and the testimony of experts, on the subject.

In our view, this decision should serve as an important guide in cases of disputes relating to ‘beneficial owner’ issues. Though the ratio of the decision is not binding on the Indian Courts, it should serve as a good guide and have strong persuasive value in related cases.