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The Fifth Protocol to the Canada-U.S. Income Tax Convention ("the Treaty")1 introduced Canada's first comprehensive Limitation on Benefits (LOB) clause,2 making access to Treaty benefits exclusive to those residents of the United States that meet one or more of the LOB conditions. While Canada has LOB clauses in about half of its 87 tax treaties, most of them are limited to denying treaty benefits to entities formed under certain tax preferential regimes.3 The introduction of a comprehensive LOB rule is a marked departure from Canada's existing treaty policy, and officials from the Canadian Department of Finance have suggested that Canada will not seek similar LOB clauses in other treaties. It appears that Canada's introduction of the LOB clause in the Treaty was in response to the Fifth Protocol's ehminating withholding tax on most interest payments (which Canada has not done in any other treaty). Canada is expected to continue its reliance on the domestic general anti-avoidance rule (GAAR) to restrict perceived abusive treaty-shopping arrangements.4
Although the new LOB clause in the Treaty is substantially similar to the LOB clauses in the U.S. Model Income Tax Treaty and most other recent U.S. income tax treaties, its interpretation remains uncertain in many aspects - especially from a Canadian perspective. The principal source of guidance on interpreting the LOB clause is the U.S. Treasury Department's Technical Explanation ("TE"),5 which was accepted by the Canadian government.6 In addition, the Canadian tax authorities have made a number of statements regarding the interpretation of the LOB clause, including:
* various technical interpretations issued by the Canada Revenue Agency (CRA);7
* statements made by officials from the CRA and the Department of Finance at the May 12, 2008, and May 21-22, 2009, meetings of the Canadian Branch of the International Fiscal Association ("the 2008 IFA Meeting" and "the 2009 IFA Meeting," respectively);
* statements made by a CRA official at a seminar on June 4, 2009, organized by the Toronto Centre CRA and Tax Professionals Group ("the June 4 Seminar"); and
* materials released by the CRA in May and June 2009 relating to the LOB clause and the claiming of treaty benefits generally.
The CRA indicated at the June 4 Seminar that it would interpret the LOB rules in a...