2015-0581521C6 IFA 2015 Q.12: Canada-Switzerland Treaty

Principal Issues: Whether the French or English version of Article 10(2)(a) of the Canada - Switzerland Tax Convention applies?

Position: The version that provides the most favourable result for taxpayers

Reasons: Consultations with Swiss and Canadian Competent Authorities and Finance Canada.

Author: Grégoire, Sylvain
Section: Canada - Switzerland Tax Convention Article 10(2)(a)

2015 International Fiscal Association Conference
CRA Roundtable

Question 12 – Canada-Switzerland Tax Convention: Article 10(2)(a)

Article 10(2)(a) of the Canada-Switzerland Tax Convention (the “Swiss Treaty”) restricts Canada's right to tax dividends paid by Canadian-resident companies to Swiss-resident companies to a maximum of 5 per cent of the gross amount of the dividends if, inter alia, the dividends are paid to a company that “owns at least 10 per cent of the voting stock and of the capital of the company paying the dividends”. However, in the French version of the Swiss Treaty, which is stated to be “equally authentic”, the rule seems to read differently. Specifically, it appears that the company receiving the dividends needs to “contrôle directement ou indirectement au moins 10 pour cent des droits de vote et au moins 10 pour cent du capital de la société qui paie les dividendes”, meaning that the Swiss-resident company needs to “control directly or indirectly at least 10 per cent of the voting rights and of the capital” of the Canadian-resident company. 

Assume a corporation resident in Switzerland (“Swissco”) owns all of the shares of another corporation (“Holdco”) which, in turn, owns all of the shares of a corporation resident in Canada (“Canco”). Assume further that paragraph 214(3)(a) of the Act applies to deem Canco to pay a dividend to Swissco. It appears that the rate of withholding tax would be 15% if one applies the English version of the Swiss Treaty but it would be reduced to 5% if one were to apply the French version.

Could the CRA provide us with its views as to the proper application of Article 10(2)(a) of the Swiss Treaty in these circumstances?

CRA Response

This discrepancy has been brought to the attention of both the Canadian and the Swiss Competent Authority as well as officials of the Department of Finance. All are in agreement that taxpayers should, in these circumstances, apply the version of the Swiss Treaty that gives them the most favourable result. We would normally expect that this would be the French version of the treaty. We should also note that although we understand that Switzerland publishes a German version of the Swiss Treaty, such version is not recognized as being “equally authentic”. Thus, only the French and English versions of the Swiss Treaty can be compared for these purposes. In this particular fact situation, it is our view that the proper rate of withholding tax on the dividend deemed to be paid by Canco to Swissco would be 5%.

Sylvain Grégoire
2015-058152
May 28, 2015

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