Husky Energy: Canadian Court Of Appeal Confirms Denial Of Beneficial Ownership

Introduction

On August 29 the Federal Court of Appeal (FCA) released its eagerly anticipated decision in Husky Energy.¹ The case involved alleged treaty shopping between Barbados and Luxembourg regarding dividends paid by a Canadian public corporation. The Tax Court of Canada (TCC) denied access to the 5 percent dividend withholding tax rate under the Canada Luxembourg tax treaty.² The FCA has now confirmed this decision, albeit from a different angle. This article summarizes the court's ruling and comments on it.

Background

In 2003 three Barbados corporations (together, the Barbcos) collectively owned a control block of 71.5 percent of the common shares of Husky Energy Inc., a Canadian public company. Ahead of the payment of a large extraordinary dividend, the Barbcos sought to reduce the 15 percent withholding tax applicable to them under the Barbados-Canada tax treaty. Accordingly, on July 22, 2003, each entered into a securities lending arrangement (SLA) with a related Luxembourg corporation (together, the Luxcos). On the same day, the Luxcos sent borrowing requests to the Barbcos for all the Husky shares they owned. The next day Husky declared a special dividend, payable on October 1, 2003, to shareholders of record on August 29, 2003. On July 24, 2003, the Barbcos transferred their Husky shares to the respective Luxcos under the applicable SLA. On October 1, 2003, Husky paid C $328,986,960 in dividends to the Luxcos and withheld 5 percent under the Luxembourg treaty. On November 20, 2003, the Luxcos returned the borrowed Husky shares to the Barbcos, together with a compensation payment equal to the gross amount of the dividends and borrowing fees of C$50,000 per Luxco.

The government assessed both Husky and the Barbcos for the shortfall between the Luxembourg treaty rate of 5 percent and the Barbados treaty rate of 15 percent. On appeal to the TCC, the court held that the Luxcos were not the beneficial owners of the dividends for the purposes of the Luxembourg treaty. As a result, it held against Husky, though it allowed the appeal of the Barbcos on the basis that only the Luxcos, as direct recipients of the dividends, could be liable for withholding tax. While the TCC considered that the dividends should have been subjected to 25 percent withholding tax, it held that it could not increase the assessed 15 percent on the basis of a long-standing tax principle that a taxpayer's appeal cannot increase a tax assessment. The TCC also held that the general antiavoidance rule did not apply in the alternative to deny the benefits of the Luxembourg treaty.

The FCA Decision

On appeal by both Husky (over beneficial ownership) and the government (over the GAAR), the FCA considered whether the Luxcos were the beneficial owners of the dividends and whether Husky was required to withhold 25 percent.³ After disposing of the appeal under the first question, the FCA refused to rule on the second. It declined to address the GAAR because doing so would not alter the result in Husky's appeal.

As a starting point to its analysis of the first issue, the FCA repeated the well-accepted test devised in Prévost Car that 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.”⁴

The FCA then went on to address Husky's grounds for appealing the TCC decision. First, it held that the TCC did not commit any palpable and overriding error in considering whether the Luxcos assumed the risk associated with the dividends, in particular by reference to the intragroup hedging agreement that eliminated the foreign exchange risk resulting from the U.S. dollar denomination of the dividends and the Canadian dollar denomination of the obligations under the SLA, without the Luxcos being required to pay any premium. Husky's point was that the hedging agreements proved that the Luxcos faced risk that they sought to mitigate through hedging. The FCA, however, viewed these hedge agreements as “atypical” because they provided perfect protection at no cost. The FCA also pointed to the other intragroup arrangements that materially reduced the economic exposure of the Luxcos and highlighted statements they made to their local tax authority in the context of a ruling request to the effect that they would not bear any material risk in connection with the Husky shares.

Second, the FCA addressed the Husky's alleged errors of law committed by the TCC. The FCA affirmed the TCC's application of the beneficial ownership test in Prévost Car and defended its reasoning against Husky's allegation that the TCC inappropriately applied an economic result test in determining beneficial ownership. The FCA was particularly careful to distinguish the SLAs in this case from arm's length SLAs that are common in financial markets. Finally, the FCA defended the TCC's reasoning on the basis of the 2003 OECD commentaries regarding beneficial ownership.

Comments

The three judges of the FCA were clearly united with the TCC judge in their collective view that the right result in this case was to deny the Luxcos, which admittedly engaged in avoidance transactions, the benefit of the lower dividend withholding tax rate under the Luxembourg treaty.

To reach this result, the FCA followed a perilous course among a number of legal concepts to conclude that the SLAs did not give the Luxcos beneficial ownership of the dividends for treaty purposes, while distinguishing standard arm's length SLAs.

The FCA's characterization of the SLAs was encapsulated in the following statement at para. 65:

It is undeniable that the SLAs were entered into between related parties on non-arm's-length terms. But does this make them “not true”? The FCA pointed out that the loan of the Husky shares under the SLAs was unsecured, contrary to the standard practice in arm's-length SLAs. Also, the FCA highlighted that there was no intention or ability for the Luxcos to either sell or on-lend the control block of Husky shares to arm's-length parties, and, if the shares were ever sold or on loaned for sale to arm's-length parties, it was inconceivable that the Luxcos would have been able to later fulfil their obligation of returning them to the Barbcos. The FCA also noted that the Luxcos derived little economic benefit from the arrangements.

Arguably, these non-arm's-length features did not detract from the essence of a securities loan, which is the delivery of the securities by the lender to the borrower in consideration for the undertaking by the borrower to return an identical number and kind of securities to the lender after a certain time.⁵ While securing the loan would have been consistent with arm's length market practice, this was not an essential characteristic of the arrangement. This is similar to a loan of money: While a bank would typically ask for interest and security for a loan, non-arm's length parties frequently lend to each other without interest or security. This does not mean that a non-arm's-length loan is not a true loan. Also, while the Luxcos did not intend to deal with the Husky shares in the way unrelated parties typically do in financial markets (for example: short selling), this did not alter the fundamental nature of the contract as a securities loan. An apt analogy is this: If I borrow a book from the library, it is fair to assume I want to read it, but maybe I just want to show off the book on my bookcase to my friends, or maybe I would need to return the book before I've read it because I didn't have time to read it. None of this changes the nature of the loan.

More troubling is the FCA's suggestion that the SLAs did not reflect the parties' intentions. It seems unlikely that the parties were mistaken about the nature of the SLAs, which leaves open the implication that the parties engaged in a sham, which was not alleged by the government or addressed by any of the parties, the TCC, or the FCA. Further in its reasons, the FCA raised that the TCC did not consider whether the Luxcos were acting as the Barbcos' agents when they received the dividends (para. 108), which reinforces the impression that the FCA thought the parties did not intend an SLA but possibly sought to put in place a mere agency.

Ultimately, it is not clear how much of this FCA analysis was needed. The crux of the matter was what meaning should be given to the expression “beneficial owner” in the Luxembourg treaty.

As a matter of historical context, starting in the mid-1960s the United Kingdom began requesting the inclusion of the “beneficial owner” qualification in some of its tax treaties in order to clarify the otherwise obvious point that nominees and other agents should not be able to claim treaty benefits in their own right.⁶ The beneficial owner limitation then made its way into the revised 1977 OECD model. As suggested by the commentaries that accompanied that model, the term “beneficial owner” was adopted for greater certainty to clarify that “an intermediary, such as an agent or nominee,” should not be eligible for treaty benefits, consistent with the original use of the term in U.K. tax treaties.

A decade later, the committee on fiscal affairs published a report titled “Double Taxation and the Use of Conduit Companies,” in which the OECD started to infuse the expression “beneficial owner” with a meaning other than its meaning in the common-law tradition and to reshape this term into a weapon that tax administrators could use to fight perceived abusive treaty shopping. This process culminated in 2003, when the OECD commentaries to articles 10, 11, and 12 were modified to reflect the work of the committee.

For example, paragraphs 12, 12.1, and 12.2 of the commentaries on article 10 of the OECD model were changed to explain that the term beneficial owner in article 10(2) of the model convention is “not used in a narrow technical sense, rather, it would be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance” (emphasis added). The commentaries refer to the conduit report and its conclusion that “a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties” (emphasis added). The key aspect of the 2003 changes quoted above is the introduction of the notion of “conduit company,” which is effectively a legal neologism without an established juridical meaning (at least in Canada). The 2003 changes to the commentaries regarding “beneficial owner” were part of a broader OECD initiative to introduce antiabuse notions in the commentaries, in reaction to perceived rampant treaty shopping that would remain unpunished either by domestic law or treaties. Finally, the process of transformation of the notion of beneficial owner was completed by the OECD in its 2014 model update.

In Prévost Car, the FCA held in favor of a treaty beneficial ownership notion firmly based on proper treaty interpretation and rooted in Canadian property law notions while rejecting a broader OECD-inspired reading propounded by the Crown — namely, that the beneficial owner of a dividend is the person that can, in fact, ultimately benefit from the dividend.

The FCA seems to have now shifted its interpretation of beneficial ownership in favor of the OECD's broader reading of this term to reach the result it deemed just. The FCA widely quoted from the 2003 OECD commentaries and used the OECD conduit notion in conjunction with pointing to the fact that the Luxcos had immaterial economics in relation to the Husky shares. Nonetheless, the FCA's decision remains ambiguous and may be limited to its facts as, on the one hand, it strenuously tries to leave standard arm's-length SLAs unscathed by suggesting that the SLAs were not true SLAs, while, on the other hand, staying clear of explicitly accusing the parties of a sham concealing a simple nomineeship under the guise of the SLAs.

Conclusion

In conclusion, our view is that tax administrators dissatisfied with a perceived abusive treaty-shopping situation should not look to beneficial ownership for assistance, but should rather invoke the domestic GAAR or treaty-based multilateral instrument's principle purpose test (PPT) or 365-day holding period antiavoidance provisions available to them in a particular context.⁷ Because the GAAR argument fizzled out in Husky Energy, to us the FCA's decision betrays possible frustration with the Alta Energy supreme court precedent as to the ability of the GAAR to deal with perceived abusive treaty-shopping arrangements and anticipates the possibility of a similar failure in Canada of the MLI PPT, in light of early decisions from India.⁸ In the end, the FCA's decision in Husky Energy seems to be an instance of la fin justifie les moyens.

Footnotes

1. Husky Energy Inc. v. Canada, 2025 FCA 176.

2 Husky Energy Inc. v. Canada, 2023 TCC 167. For commentary on this case, see Michael N. Kandev, “Canadian Court Changes Course on Beneficial Ownership,” Tax Notes Int'l, Mar. 4, 2024, p. 1265.

3. Canada's domestic dividend withholding tax rate, which may be reduced (typically to 15 percent or 5 percent) under an applicable tax treaty.

4. Prévost Car, 2009 FCA 57, at para. 13; Prévost Car, 2008 TCC 231, at para. 100.

5. This type of arrangement would generally be characterized as a simple loan under article 2314 of the Civil Code of Québec: “A simple loan is a contract by which the lender hands over a certain quantity of money or other property that is consumed by use to the borrower, who binds himself to return a like quantity of the same kind and quality to the lender after a certain time.” See also CIBC Mortgage Corp. v. Vasquez, [2002] 3 S.C.R. 168, at para. 83. The essence of a loan is an obligation to repay: see Wilson v. Ward, [1930] S.C.R. 212. In Bradley v. R, [1996] 1 C.T.C. 2237 (rev'd on other grounds, [1998] 3 C.T.C. 393 (FCA)), the TCC said: In law, a loan has been defined as follows:

A “loan” is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows.

A “loan” within the law of usury is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount with or without an additional sum agreed upon for its use.

To constitute a “loan,” there must be an express or implied agreement whereby one person advances money to another, who agrees to repay it on such terms as to time and rate of interest, or without interest, as parties may agree.

6. For detailed review and analysis, including in respect of history, see Kandev and Matthew Peters, “Treaty Interpretation: The Concept of ‘Beneficial Owner' in Canadian Tax Treaty Theory and Practice” in Report of Proceedings of the Sixty Third Tax Conference, 2011 Canadian Tax Foundation conference, at 26:1-60 (2012).

7. Kandev, “Please, Leave ‘Beneficial Ownership' Alone!” 139 Wolters Kluwer International Tax 1-4 (Dec. 2024).

8. See SC Lowy P.I. (Lux) S.A.R.L. v. Assistant Commissioner of Income Tax, ITA No. 3568/DEL/2023 (Dec. 30, 2024); Sky High Appeal XLIII Leasing Co. Ltd. v. Assistant Commissioner of Income Tax, [2025] 177 taxmann.com 579 (Aug. 13, 2025).

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