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Canada Tax Court Decision

  1. Facts of the Case

C&W Offshore Ltd. (“C&W Offshore”) is a Canadian‑resident corporation engaged primarily in the fabrication of metal structures for the offshore oil and gas industry. In December 2013, it was urgently asked by Seadrill Canada Ltd. to source heavy subsea mooring chains for the West Aquarius offshore drilling rig operating off Newfoundland.

C&W Offshore contacted InterMoor Ltd. (UK) (“InterMoor UK”), a UK‑resident company specialising in offshore mooring equipment rentals. InterMoor UK did not own the required 84 mm DNV‑certified chains and therefore sourced them from its Norwegian affiliate, InterMoor AS (“InterMoor Norway”), which was the owner of the chains. InterMoor UK leased the chains from InterMoor Norway and subleased them to C&W Offshore. There was no written agency agreement between InterMoor UK and InterMoor Norway.

Between December 2013 and February 2015, C&W Offshore paid rentals to InterMoor UK under monthly rental invoices. The payments were made directly to InterMoor UK’s UK bank account and recorded as income by InterMoor UK. C&W Offshore did not withhold Part XIII tax on the payments.

The Revenue reassessed C&W Offshore for failure to withhold 10% non‑resident tax under Canadian domestic law, applying the Canada–UK Tax Convention, and imposed penalties.

  1. Legal Issue

Whether rental payments made by C&W Offshore to InterMoor UK for offshore mooring chains constituted royalties subject to withholding tax under Canadian domestic law and Article 12 of the Canada–UK Tax Convention, and whether InterMoor UK was the beneficial owner of those payments.

 

  1. Taxpayer Arguments
  • The rental payments were economically split:
    • equipment rental income beneficially owned by InterMoor Norway; and
    • “processing” or administrative fees earned by InterMoor UK.
  • InterMoor UK acted only as a conduit or intermediary with no discretion over the rental income.
  • InterMoor Norway was the true beneficial owner because it:
    • owned the chains;
    • controlled their use and deployment;
    • bore the risks of damage and loss; and
    • set key commercial terms.
  • The portion attributable to InterMoor Norway constituted business profits under Article 7 of the Canada–Norway Tax Convention and was not subject to Canadian withholding tax.
  • InterMoor UK’s portion constituted business profits under Article 7 of the Canada–UK Tax Convention, not royalties.

 

  1. Revenue Arguments
  • The rental payments were “rent, royalty or similar payments” under the domestic law.
  • C&W Offshore leased the chains directly from InterMoor UK, not from InterMoor Norway.
  • InterMoor UK was the beneficial owner of the rental payments because it had:
    • possession (payments paid into its bank account);
    • control (exclusive control over the account);
    • use (ability to use funds before paying Norway); and
    • risk (exposure to non‑payment and liability under the lease).
  • Ownership of the equipment does not determine beneficial ownership of payments.
  • There was no agency relationship between InterMoor UK and InterMoor Norway (no consent, authority, or control).
  • Article 12 of the Canada–UK Tax Convention applied, reducing withholding tax to 10%.

 

  1. Court’s Analysis

The Court accepted that the payments were royalties for the use of industrial equipment and fell within paragraph 212(1)(d) ITA and Article 12 of the Canada–UK Tax Convention.

Applying the Prévost Car test, the Court focused on possession, use, control, and risk in relation to the payments (not the equipment). The evidence showed that InterMoor UK:

  • received the payments directly;
  • controlled and used the funds;
  • bore payment‑term risk (payable to Norway before collection from C&W Offshore); and
  • insured and bore commercial risks related to the rental.
  • InterMoor Norway’s ownership of the chains did not make it the beneficial owner of the rental payments. No agency relationship existed between the two entities.

 

  1. Conclusion

The Court dismissed the appeal in full. The rental payments were royalties paid to InterMoor UK, which was the beneficial owner. C&W Offshore was therefore required to withhold and remit 10% withholding tax under the Canada–UK Tax Convention.