CFC Adopts U.S. Interpretation of U.S.-Canada Tax Treaty Over Canadian Interpretation (8/27/26)

In The South Saskatchewan Comm. Fdn., Inc. v. United States, ___ Fed. Cl. ___  (8/25/26) (“South Saskatchewan”), CFC here, TN here, and GS here [to come], the Court rejected a Canadian charity’s attempt to apply an exemption in the United States-Canada Convention with Respect to Taxes on Income and on Capital (including a key Protocol). I found South Saskatchewan interesting because of the CFC’s application of interpretive techniques to resolve the treaty dispute between the parties in a situation where the Canadian tax authority and the U.S. did not agree on the interpretation as applied to the facts.

South Saskatchewan starts with the goal of treaty interpretation being to effectuate the shared understanding of the parties to the treaty. This is the contract model of interpretation. But, in this case, Canada’s understanding of the treaty is not the U.S.’s understanding. I infer that, assuming Canada’s current interpretation was taken in good faith, Canada did not have a shared understanding with the U.S. What does a court do when it cannot discern a shared understanding?

South Saskatchewan says (Slip Op. 6) after citing Loper Bright:

The meaning of both U.S. and Canadian laws, as well as that of the Tax Treaty, is susceptible to being construed, interpreted, and applied using traditional methods of statutory interpretation.

I am not sure how traditional methods of statutory interpretation flange with the goal of interpreting treaties to apply the shared understanding of the parties. Since, for U.S. purposes, the treaty is the law of the land and the treaty is text, I guess it is close enough to written law (statutes) that the interpretive model for statutes can apply. Maybe.

The Court adopts the U.S. interpretation based on a textualist reading of the Treaty Protocol. The Court finds helpful “extrinsic evidence” in the “legislative history” [caveat, legislative history is my term not the Court’s] of the Senate’s ratification of the Protocol. This legislative history is (i) the Treasury Technical Explanation accompanying the submission of the Protocol to the Senate for approval and (ii) the Joint Committee on Taxation (“JCT”) Report which “reflects the contemporaneous understanding of the Senate that ratified the Fifth Protocol.” (Slip Op. 9.) Both documents informed the Senate of the meaning of the Protocol.

In writing long ago, I argued that the shared expectation of the parties model for treaty interpretation should not control in U.S. Court interpretation of treaties; instead what should control is the understanding of the Senate in ratifying, an understanding informed by the legislative history (such as the Treasury Technical Explanation and the JCT explanation). In Federal Tax Procedure (Practitioner Edition 2026) 503 n. 2171, I assert:

2171 The current U.S. model is the 2016 model, titled United States Model Income Tax Convention (2016). The U.S. Model Treaty is based significantly on the OECD Model. For an explanation of how these tax treaties are negotiated, ratified, and interpreted, see John A. Townsend, Tax Treaty Interpretation, 55 Tax Law. 219 (2001) (also arguing for a Chevron-type deference for the executive branch’s treaty interpretations, most particularly those in the technical explanation accompanying the particular treaty and other submissions that inform the Senate Finance Committee in its ratification of the treaty); but see Michael S. Kirsch, The Limits of Administrative Guidance in the Interpretation of Tax Treaties, 87 Tex. L. Rev. 1063 (2009). I think the conceptual confusion in the area of how a U.S. court interprets a treaty , particularly a tax treaty, arises from a focus on a contract model a treaty to meet the “shared expectations of the parties,” rather than the executive branch interpretation of the treaty it negotiated and the Senate’s understanding of the treaty it ratified. Those interpretations where clear should, in my view, inform U.S. courts’ interpretation and application of the treaty rather than any  search for how the treaty partner interpreted the treaty. Of course, the treaty partner’s reasonable interpretations not shared by the executive branch or the Senate may mean that the U.S. and the treaty partner did not have a meeting of the minds on the treaty and that, in some international court, the treaty partner may be entitled to hold the U.S. to the treaty partner’s reasonable interpretation. But, from a U.S. law perspective and in U.S. courts, it is the treaty that the executive branch negotiated and the Senate ratified that alone is the law of the land and what should control the law of the land is the executive branch’s and Senate’s understandings of the treaty. This is, of course, my BS and I am sticking to it even in the face of apparent lack of acceptance of my BS. And then you get to the issue of deference, and I would suggest that in the treaty area, deference is particularly appropriate (for reasons other than Chevron deference which has now been overruled (see discussion beginning p, 90), but I must end this footnote. Perhaps, if the “shared expectations” model is accepted, deference could still be applied if the shared expectations are ambiguous.

On the deference issue I have recently claimed in John A. Townsend, Loper Bright Flip Flops on Chevron Deference: A Tax Lawyer's Perspective, 79 Tax Lawyer 323, 385 (2026) (footnotes omitted)

I. Deference Not Based on Congressional Delegation

As noted earlier, Loper Bright assumes that Congress can delegate  deference-entitled interpretive authority to an executive agency. I suggest, as I have previously, well before Loper Bright’s demise of deference, that the Executive may have interpretive authority in some legal contexts for different reasons. The example I offer is the treaty context, which I develop in an article for tax treaties but argue that interpretive authority, and resulting deference, should apply for treaties generally.226 Since I have developed that argument in the cited article, I won’t discuss it here, except to say that the argument is independent of Loper Bright deference, Chevron deference, or pre-Chevron deference as a basis for deferring to Executive treaty interpretation.227

226 John A. Townsend, Tax Treaty Interpretation, 55 TAX LAW. 219, 219-307 (2001).
227 The argument applies specifically to the Treasury Explanation of the Tax Treaties when they are sent to the Senate for the ratification process and generally informs the Senate as to the interpretation of the treaty Treasury negotiated. Further, not only does the Treasury have special competence in tax treaty interpretation, but also the Senate’s statements as to its understanding of the tax treaty (often based largely on the Treasury explanation) it ratified should be given weight. The Treasury Explanation and the Senate “history” may be useful in determining the scope of the Treaty the Senate ratified that is then law. It is often said that, in treaty interpretation, the courts should effectuate the intent of the treaty partners, much like contract interpretation. I argue, however, that the courts should also effectuate the intent of the Executive and the Senate in ratifying the treaty and making it the law of the land. This may or may not be consistent with the mutual expectations of the parties, or more properly may not be consistent with the expectation of the non-U.S. treaty partner. I should note that the Tax Court passed up the opportunity to address the Loper Bright implications, if any, for tax treaties in Ryckman v. Commissioner, 163 T.C. 46 (2024) .

 In South Saskatchewan, the Court said (Slip Op. 19):

           Among the sources of extrinsic evidence that may aid in interpreting a treaty are the technical explanations of tax treaties prepared by the Treasury Department. Deference is not generally given to the Treasury Department’s interpretation of a treaty expressed in its technical explanation because it does not typically reflect the views of the other contracting nation. Christensen, 168 Fed. Cl. at 307. The Federal Circuit has instructed that agency interpretations of treaties are entitled to “less deference” when the “‘agency and a foreign country disagree on the meaning of a treaty.’” Nat’l Westminster Bank, PLC v. United States, 512 F.3d 1347, 1358 (Fed. Cir. 2008) (quoting Iceland S.S. Co., Eimskip v. U.S. Dep’t of the Army, 201 F.3d 451, 458 (D.C. Cir. 2000).

          While the Technical Explanation cannot supplant the language of the treaty if the two documents are in tension, it serves as extrinsic evidence of the signatories’ contemporaneous understanding of the provisions of the Tax Treaty. The Technical Explanation is especially probative here because it is not merely a U.S. interpretation of the Tax Treaty. Rather, it is “an official United States guide to the [Fifth] Protocol[]” that “[t]he Government of Canada has reviewed . . . and subscribe[d] to its contents.” (ECF 19-8 at 2.) The Technical Explanation notes of itself that it “accurately reflects the policies behind particular Protocol provisions, as well as understanding reached with respect to the application and interpretation of the protocol and the Convention.” (Id.) Because Article IV(6) and Article XXI(3) were both added to the Tax Treaty through the Fifth Protocol, the Technical Explanation’s summary of the purpose and effect of these provisions is directly relevant and highly probative to discerning the signatories’ shared understanding of the purpose, scope, and intended interaction of the two provisions. GE Energy Power, 590 U.S. at 441.

So, in the end, South Saskatchewan said it gave no deference to the Treasury explanation but it did rely on the Treasury and JCT explanations to support its interpretation. That could be a Skidmore-type reliance but the Court does not cite Skidmore. And keep in mind that Loper Bright’s rejection of Chevron deference for the agency interpretation was based on presumed delegation from ambiguity in the text. That reasoning cannot apply to ambiguity (if any) in treaty text which has never been considered a delegation to each treaty partner to fill in the gap in the way Chevron did. So, I am not sure that Loper Bright analysis helps in the treaty interpretation context.

An analogy that comes quickly to mind is the Attorney General’s Manual on the Administrative Procedure Act (1947) which is given “some deference because of the role played by the Department of Justice in drafting the legislation.” E.g., Kisor v. Wilkie, 588 U.S. 558, 582 (2019) (plurality opinion, quote cleaned up; citing Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 546 (1978)). Indeed, the AG Manual on the APA is a form of subsequent legislative history, whereas the Treasury Technical Explanation and JCT explanation are direct legislative history in the Senate ratification process which makes the treaty the law of the land. Given the constitutional role of the Executive Branch in negotiating treaties and explaining them to the Senate, why would not the Treasury Explanation be entitled to some deference if there is no indication that the Senate understood differently? And why would not the JCT explanation be entitled to some deference or weight for the same reason if there is no indication that the Senate understood differently?