C&W Offshore: Beneficial Ownership In A Back-to-back Loan Context

Overview

In C & W Offshore Ltd. v. The King,¹ the Tax Court of Canada held that a United Kingdom corporation (“InterMoor UK”) was the beneficial owner of rental payments made by an arm’s length Canadian corporation (“C&W”) under a sublease of mooring chains, even though the bulk of those payments were remitted by InterMoor UK to its Norwegian affiliate (“InterMoor Norway”) from which it had originally leased the mooring chains. The Tax Court concluded that C&W failed to withhold the non-resident tax under Part XIII of the Income Tax Act (Canada) and was subject to a penalty of 10% of the amounts it failed to withhold.

Background

C&W is a Canadian corporation specializing in the manufacture of metal structures for Newfoundland and Labrador’s offshore oil and gas industry. In December 2013, one of its customers, Seadrill Canada, asked C&W to urgently procure and deliver heavy subsea mooring chains. To fulfill this request, C&W contacted InterMoor UK, a supplier of offshore mooring equipment, which arranged for the sublease of mooring chains from its Norwegian affiliate, InterMoor Norway, to C&W Offshore.

Under the leasing arrangement, InterMoor Norway invoiced InterMoor UK for rental payments every 30 days. Under the subleasing arrangement, InterMoor UK invoiced C&W Offshore every 60 days. The amounts charged under the lease and the sublease were identical (the “Rental Payments”), except that InterMoor UK retained a processing fee, described in testimony as InterMoor UK’s markup. C&W did not withhold Part XIII tax on the Rental Payments made to InterMoor UK, and based on testimonial evidence, no inquiries were made to determine if any amount should have been withheld.

C&W argued that InterMoor Norway was the beneficial owner of the Rental Payments and that InterMoor UK was merely an agent interposed between the parties. Accordingly, C&W submitted that the rental payments should have been exempt from withholding tax under the Canada-Norway Tax Treaty². C&W further argued that InterMoor UK had no discretion or control over the Rental Payments because it was contractually required to pass them along to InterMoor Norway.

The Crown argued that InterMoor UK was the beneficial owner of the Rental Payments which were consequently subject to a 10% withholding tax rate under the Canada-United Kingdom Tax Treaty.³

The Tax Court Decision

The Tax Court found that InterMoor UK was the beneficial owner of the Rental Payments based on the test set out by the Federal Court of Appeal in Prévost Car Inc. v. Canada.⁴ The Tax Court found that InterMoor UK had possession, control and use of the Rental Payments and assumed the risk associated with them. In particular, the Court noted that the Rental Payments were made by C&W directly to InterMoor UK’s bank account, giving InterMoor UK exclusive and unrestricted control over the funds and the ability to use them for its own benefit. Furthermore, the Court found that InterMoor UK assumed the risk associated with the rental payments because it was required to pay InterMoor Norway under 30-day payment terms, even if C&W failed to pay InterMoor UK under the 60-day payment terms.

The Court also concluded that there was no evidence that InterMoor UK was acting as an agent of InterMoor Norway. In particular, the record did not establish the essential elements of an agency relationship, namely, the consent of both parties, the agent’s authority to affect the legal position of the principal, and the principal’s control over the agent’s actions.

Therefore the Court found that C&W was required to withhold a 10% tax on Rental Payments under the Canada-United Kingdom Treaty.

The Court also found that C&W failed to establish that it could rely on the due diligence defence to avoid the imposition of the 10% penalty on the amounts it failed to withhold. The evidentiary record showed that C&W had not taken reasonable precautions to prevent the failure to withhold tax on the Rental Payments, nor had it been misled by any person or circumstance into believing in a non-existent state of facts.

Takeaways

The Tax Court’s decision reaffirms that the beneficial ownership test in Prévost Car continues to apply in determining withholding obligations under tax treaties of the same generation as the one interpreted in Prévost Car. Where a tax treaty doesn’t define the term “beneficial owner”, the analysis should focus on the four attributes of ownership: possession, use, control and risk.

In light of the Tax Court’s decision, the fact that a payee is contractually required to remit the funds received, or a portion thereof, to another party does not, in itself, mean that the payee ceases to be the beneficial owner of those funds, provided that its contractual obligation to pay is not contingent on its receipt of the funds.

Interestingly, C&W argued that if InterMoor UK was acting as an agent, it would be possible to look through it and apply the Canada-Norway Convention on the basis that InterMoor Norway was the beneficial owner of the Rental Payments, thereby exempting them from Part XIII tax. This position contrasts with Justice Owen’s remarks in Husky Energy Inc. v. The King,⁵ in which he suggested that only the non-resident to which an amount is paid may benefit from the reduced rate provided under a tax treaty. That statement sparked controversy and generated uncertainty within the tax community, as it appears difficult to reconcile with commercial transaction practices as well as OECD commentaries recognizing that treaty benefits may, in certain circumstances, be determined on a look-through basis in presence of an agent or a conduit.

Footnotes

1. 2026 TCC 40.

2. Convention Between the Government of Canada and the Government of the Kingdom of Norway 1966 For the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes On Income, 23 November 1966, CTS 1967 No 8.

3. Convention Between the Government of Canada and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, 8 September 1978, E102382 - CTS 1985 No. 42.

4. 2009 FCA 57 (« Prévost Car »).

5. 2023 TCC 167. The Federal Court of Appeal did not rule on this issue but hinted that the Tax Court’s decision could “negatively impact ordinary commercial transactions” in Canada v. Hutchison Whampoa Luxembourg Holdings S.À R.L., 2025 FCA 176, para. 107.

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