Canada Puts Treaty-Shopping Tax Plan on Hold

Canada’s government is putting on hold plans to clamp down on off-shore tax shelters used by private-equity funds amid concern the measure could curb investment into the country.

The finance department announced in its Feb. 11 budget it wanted to deny tax benefits to foreign investors setting up holding companies in other countries to capitalize on friendly tax treaties. After consultations, the government said Aug. 29 it will hold off and wait for the Organization for Co-operation and Development’s work on the matter.

“That’s a very welcome change,” said Albert Baker, global tax policy leader at Deloitte LLP in Toronto. “They would not have had the benefit of the full OECD input” without the delay.

The decision to postpone the measure puts Canada on the same track with other countries seeking to curb tax evasion and treaty shopping that have been eroding tax bases. The OECD released draft proposals in March that recommended the issue be tackled through changes to tax treaties. That’s a different approach from what the Canadian government had proposed, which focused on overriding tax treaty obligations, Baker said.

“The way the proposal was being put forward could create a lot of uncertainty and perhaps discourage foreign capital,” Baker said.

Private equity firms have been looking to the nation’s oil and gas industry as a potential opportunity for investment.

Blackstone Group LP used Luxembourg as the base for a holding company it created with Houston-based Alta Resources LLC, called Alta Energy Luxembourg S.a.r.l, to drill for natural gas liquids in the Duvernay formation in Alberta.

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