5.3.3.4 Concurrence of the Canadian system with tax treaties

This research aims to determine whether the separate entity approach for the application of treaty rules in the OECD MTC should be replaced by a group approach. As the Canadian system applies a group approach, the question arises whether the Canadian system leads to issues which might be relevant for a group approach from a tax treaty perspective. Tax treaties concluded by Canada are solely signed by the federal government1 and solely cover federal taxes.2 Provincial taxes are thus in principle not restricted by tax treaties.3 The formulaic method that is used to determine a taxpayer’s income earned in a province is therefore not hindered by the application of tax treaties.

As the Canadian method is mainly aimed at tax profits arising within the borders of the respective province, the question arises whether there could be a conflict with tax treaties if provincial taxes would be in scope of the tax treaties. If the formulaic system is applied to determine the income allocable to various permanent establishments within Canada, this is not the case. It is a purely domestic situation and should as such not be influenced by the application of tax treaties. Solely if a Canadian resident taxpayer has a foreign permanent establishment, or if a foreign taxpayer conducts business in Canada via a permanent establishment there would be a cross-border element for which tax treaties might play a role. However, as indicated, there is no conflict with the tax treaties concluded by Canada as the taxes levied by the provinces are not within their scope.