Tax Treaty Case Law around the Globe 2012

Canada: Capital Gains

Jacques Sasseville

13.1. Introduction

The decision of the Tax Court of Canada in Sommerer v. The Queen was rendered on 16 May 2011. This decision by Justice Campbell Miller relates to the taxation of a Canadian resident on a capital gain derived from the sale of shares by an Austrian private foundation which had previously acquired these shares from this Canadian resident. As Justice Miller put it, the case dealt with “a smorgasbord of issues regarding trusts, corporations, agency, the definition of shares, treaty interpretation and Austrian law”.

The interesting treaty question raised by the case is whether the provisions of the Canada-Austria tax treaty prevent the application of domestic settlor trust rules, which are anti-abuse rules that have the effect of attributing to certain persons, for tax purposes, income and gains realized through a trust.

The case is somewhat reminiscent of the United Kingdom’s Smallwood case, which HMRC won before the Special Commissioners, lost in the High Court but ultimately won back in the Court of Appeal. While Smallwood implicitly raised the issue of the interaction between tax treaties and settlor trust rules, it was not decid...