The Relationship Between Restrictions on the Deduction of Interest Under Canadian Law and Canadian Tax Treaties

Canadian Tax Journal/Revue fiscale canadienne, 2019, Vol. 67, No. 4, p. 1051-1076

26 Pages Posted: 17 Jan 2020

Date Written: December 27, 2019

Abstract

The author analyzes the provisions of Canadian tax treaties and those of the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) model conventions to determine whether they would prevent the application of the restrictions on the deduction of interest under the Canadian Income Tax Act — namely, the thin capitalization rules and rules that deem interest to be dividends. Although the provisions of the model conventions would prevent the application of the Canadian thin capitalization rules, the provisions of Canadian tax treaties have been carefully negotiated to allow the application of those rules. The author also questions whether the provisions of the OECD and UN model conventions should be interpreted to prevent the application of thin capitalization rules, and he concludes that restrictions on the deduction of interest under domestic law should be prevented by the provisions of the model conventions only if those restrictions are discriminatory.

Keywords: Income tax treaties, interest deductibility, non-discrimination rules, debt-to-equity ratio, transfer pricing, OECD and UN model conventions

Suggested Citation

Arnold, Brian J., The Relationship Between Restrictions on the Deduction of Interest Under Canadian Law and Canadian Tax Treaties (December 27, 2019). Canadian Tax Journal/Revue fiscale canadienne, 2019, Vol. 67, No. 4, p. 1051-1076, Available at SSRN: https://ssrn.com/abstract=3510265

Brian J. Arnold (Contact Author)

Goodmans LLP Toronto ( email )

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Suite 2400, Box 24
Toronto, Ontario M5B 2M6
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