1. Tax Executives Institute – Dallas Chapter U.S./Canada Tax Update – March 12, 2013 Update on International Tax Cases from Canada/Commonwealth Countries Kathleen Penny Blake, Cassels & Graydon LLP kathleen.penny@blakes.com 416-863-3898

2. Foreign Entity Classification Cases Basic approach to foreign (including U.S.) entity classification taken by Canadian and U.K. courts R. v. Sommerer (2012, Canadian Federal Court of Appeal) –Austrian foundation classified as trust for Canadian tax purposes 2

3. Foreign Entity Classification Cases HMRC v. Anson (2013, U.K. Court of Appeal) –U.S. LLC classified as “opaque” entity, i.e. not “tax transparent” for U.K. tax purposes (even though was “tax transparent” for U.S. tax purposes) –result was that U.K. resident who was member of U.S. LLC did not get foreign tax credit in U.K. or double tax relief under U.K./U.S. treaty, for U.S. federal and state tax paid in U.S. on his share of LLC’s profits (resulting in total effective tax rate of 67%) –similar issue in Canada where Canadian resident individual is member of U.S. LLC 3

4. Foreign Entity Residence Case Canadian resident person/entity subject to Canadian tax on worldwide income/gains (subject to any treaty relief/foreign tax credits) Garron Family Trust (2012, Supreme Court of Canada) –trust with Barbados trustee (and formed under Barbados law) –residence of trust not necessarily = residence of trustee –residence of trust is where central management and control take place –similar to corporate residency test based on place of central management and control 4

5. Classification and Residence of U.S. Entities for Canadian Tax Purposes U.S. “per se” corporation (“C” or “S”) = corporation for Canadian tax purposes –U.S. residence only due to treaty “tie-breaker” rule U.S. limited liability company (LLC) = corporation for Canadian tax purposes –Canada/U.S. tax treaty status –residence for Canadian tax purposes based on place of management and control if not a corporation for U.S. tax purposes U.S. general or limited partnership = partnership for Canadian tax purposes U.S. trust = true trust for Canadian tax purposes (unless “bare” trust) –Canada/U.S. tax treaty status of U.S. grantor trust 5

6. “Beneficial Ownership” Cases Velcro Canada Inc. (2012, Tax Court of Canada) –Netherlands licensor found to have “beneficial ownership” of royalties paid by Canadian taxpayer –back-to-back licenses (Canada/Netherlands and Netherlands/Netherlands Antilles) but no automatic passing through of royalties and other favourable facts –not under appeal HMRC v. Anson (2013, U.K. Court of Appeal) –not really a “beneficial ownership” case, but note that LLC’s profits treated as belonging to LLC and not its members, in spite of automatic allocation provisions 6

7. Tax Treaty Interpretation, and Impact of Retroactive Domestic Tax Legislation Sanofi Pasteur Holding SA (2013, India High Court) –sale (in 2009) by French taxpayer of shares of French corporation, sole assets of which were shares of Indian companies –retroactive legislation passed by India to reverse results of Vodafone decision was applied, and this was upheld by court –however, court applied exemption under India/France tax treaty –French taxpayer did not derive gain from the alienation of shares in an India resident company, was not the legal or beneficial owner of shares of underlying Indian companies –court stated that “see through” approach would be a “strained construction” of treaty provisions 7

8. Other Important Canadian Cases in 2012/2013 GlaxoSmithKline Inc.(2012, Supreme Court of Canada –pharmaceutical company transfer pricing case –license agreement with one non-Canadian affiliate and purchases of active ingredients from another non-Canadian affiliate –case still ongoing Daishowa-Marubeni International Ltd. (pending in 2013, Supreme Court of Canada) –important case re: Canadian tax treatment of contingent liabilities, possible impact on handling of contingent liabilities in M&A, real estate and resource transactions 8