Under Canada’s Part XIII withholding tax rules, beneficial ownership of a cross-border payment depends on who actually receives, controls, and bears the risk on that payment — not on who owns the underlying asset generating it. In C&W Offshore Ltd. v. The King, 2026 TCC 40, the Tax Court applied the beneficial-ownership test from Prévost Car and found that a UK intermediary company was the beneficial owner of equipment rental payments, even though the equipment itself was owned by a Norwegian affiliate. The Court also rejected an agency argument, upheld a related penalty, and confirmed the Canadian payer bore the withholding obligation.
The Facts
Between December 2013 and February 2015, C&W Offshore Ltd., a Canadian company, leased subsea mooring chains for an offshore rig project from InterMoor Ltd. (“InterMoor UK”), a UK resident. InterMoor UK itself leased those chains from its Norwegian affiliate, InterMoor AS. C&W Offshore paid approximately $8.9 million to InterMoor UK and did not withhold any Canadian tax on those payments.
The Minister reassessed C&W Offshore for failing to withhold tax under paragraph 212(1)(d) of the Income Tax Act and Article 12 of the Canada–UK tax treaty, plus a related penalty — a combined $901,250 in withholding tax and $90,128 in penalties across the 2014 and 2015 taxation years.
The Beneficial Ownership Test
The parties agreed the payments were royalties under the treaty, and that withholding was required if InterMoor UK — not InterMoor Norway — was the beneficial owner of the payments. Applying the Prévost Car framework, the Court considered possession, use, control, and risk:
- Possession: C&W Offshore paid all invoices directly into a UK bank account under InterMoor UK’s exclusive control.
- Control: InterMoor UK had unrestricted control over those funds once deposited.
- Use: InterMoor UK could use the funds for its own benefit during the gap between its payment terms with C&W Offshore and its own payment obligation to InterMoor Norway, and recorded the full amount as its own revenue.
- Risk: InterMoor UK was contractually liable to InterMoor Norway regardless of whether C&W Offshore paid, and separately bore the risk of damage to the chains.
The Court concluded InterMoor UK was the beneficial owner. Critically, InterMoor Norway’s ownership of the physical chains did not, by itself, confer beneficial ownership of the rental payments — asset ownership and payment entitlement are distinct questions.
The Agency Argument
C&W Offshore’s fallback argument — that InterMoor UK was merely acting as InterMoor Norway’s agent — was also rejected. The Court found no evidence of any agency relationship: no written, verbal, or implied agreement; InterMoor UK set its own prices and terms independently; and a customs form listing InterMoor Norway as “vendor” was not evidence of agency, since that term refers to the exporter for customs purposes only.
The Penalty — a Due Diligence Lesson
Having found withholding was required, the Court addressed whether C&W Offshore could escape the penalty under the due diligence defence. It could not. C&W Offshore’s president testified he simply assumed InterMoor UK would handle its own tax obligations — he never turned his mind to whether C&W Offshore itself had a withholding obligation. The Court held that an unexamined assumption is not a reasonable mistake of fact: the due diligence defence requires showing the taxpayer was actually misled into a mistaken belief, not merely that it never considered the issue. Relying on invoices that said nothing about withholding tax, without any independent tax advice, was not reasonable reliance either.
Why This Reaches Beyond One Equipment Lease
Several of Canada’s tax treaties define royalties broadly enough to capture payments for the use of industrial, commercial, or scientific equipment — not just licensing in the traditional sense. But whether a given equipment lease is classified as a royalty, and at what rate, depends on the specific treaty and the facts involved; this case does not establish that every cross-border equipment lease receives the same treatment. What it does confirm is that the withholding obligation and penalty risk fall on the Canadian payer under section 215 of the Income Tax Act — assuming a foreign counterparty will “sort out its own tax” is not a defence.
FAQ
What is Part XIII withholding tax?
Part XIII imposes withholding tax — 25% domestically, often reduced by treaty — on certain payments by Canadian residents to non-residents, including rent, royalties, and similar payments.
What test does the Court use for beneficial ownership?
The Prévost Car framework, which looks at whether the recipient has possession, use, and control of a payment, and bears the associated risk — as opposed to being a mere intermediary.
Does owning the underlying asset make you the beneficial owner of income it generates?
Not necessarily. This case confirms asset ownership and beneficial ownership of a payment stream are separate questions.
What does it take to establish agency between two related foreign entities?
Courts look for consent of both parties, authority for the agent to affect the principal’s legal position, and the principal’s actual control — evidence, not inference from corporate structure alone.
Can a Canadian company avoid a withholding penalty by relying on a supplier’s invoices?
Not on these facts. Invoices silent on withholding tax, without independent tax advice, did not amount to reasonable due diligence.
Who is responsible for withholding tax on a cross-border payment?
The Canadian payer, under section 215 of the Income Tax Act — not the non-resident recipient.
Practical Takeaways
- Beneficial ownership turns on possession, use, control, and risk over a payment — not on who owns the asset generating it.
- Without documented agency terms, an intermediary receiving a cross-border payment will generally be treated as its beneficial owner.
- Treaty classification of equipment rentals depends on the specific treaty and facts; an unexamined assumption that a counterparty will handle its own tax is not a due diligence defence.
Withholding tax and beneficial ownership questions are one part of a broader international tax practice; see our Canadian International Tax Services for the complete picture.
Making payments to a non-resident supplier or affiliate?
Canadian withholding obligations should be reviewed before payments begin. Lepore & Company assists Canadian businesses with Part XIII withholding, treaty analysis, cross-border payment structures, and CRA disputes.
This article discusses a single Tax Court of Canada decision and is provided for general informational purposes only. It does not constitute legal, tax, or accounting advice. Whether a payment triggers Canadian withholding tax, and who is its beneficial owner, depends on the specific facts and documentation involved. Please contact Lepore & Company or a qualified professional before relying on treaty relief for a cross-border payment.