Canada, along with 67 other jurisdictions, were the original signatories to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI"). The MLI is part of the Organisation for Economic Co-operation and Development (the "OECD") initiative to combat base erosion and profit shifting ("BEPS"), which generally refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to shift profits to low or no-tax jurisdictions. The MLI is an instrument that sits on top of many of Canada's existing bilateral treaties and implements parts of BEPS that otherwise would have required bilateral treaty negotiations and amendments. The MLI will modify up to 75 of Canada's bilateral tax treaties (the "Covered Tax Treaties"). Since much has been written about the MLI, the purpose of this bulletin is to provide a brief overview of the MLI as it applies to the Covered Tax Treaties, highlight recent pronouncements from the Canada Revenue Agency (the "CRA") regarding the expected implementation date and address the impact the MLI will have on existing foreign holding company structures and tax planning for non-residents investing in Canadian real and resource property.

One of the MLI's most notable modifications to the Covered Tax Treaties is the addition of a broad anti-avoidance rule referred to as the principal purpose test ("PPT"). The PPT will apply as an interim measure to the Covered Tax Treaties, but Canada intends to adopt a limitation on benefits provision, in addition to or in replacement of the PPT, through bilateral negations. The Canada-US Tax Treaty is excluded as the US did not sign the MLI. The PPT states that a treaty benefit may be denied where it is reasonable to conclude that one of the principal purposes of the arrangement or transaction in question was to gain the benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty. The PPT uses a subjective test to determine the aim of the taxpayer using a certain arrangement to which a treaty benefit would apply and an objective test to see if granting that treaty benefit would frustrate the object and purpose of the relevant treaty provision.

At the Canadian Tax Foundation Annual Conference held in November of this year, CRA indicated that it is considering establishing a centralized committee which would handle the application of the PPT to transactions undertaken by taxpayers, using the General Anti-Avoidance Rule (the "GAAR") Committee as a model. CRA also indicated that it expects that the MLI will not enter into force before 2019, and since the statute implementing the MLI and PPT has not yet been drafted, interactions between the MLI and domestic legislation, such as GAAR, are unknown. The CRA declined to comment on the amount of weight that CRA will give to the examples set out in the 2017 OECD Model and Commentary in determining whether a particular structure or transaction satisfies the object and purpose clause within the PPT.

With the limited interpretive guidance that has been released to date, whether or not treaty benefits will apply in a variety of situations is still uncertain. The PPT will be satisfied if "one of the principal purposes" of a transaction is obtaining a treaty benefit. This purpose does not have to be the sole or essential purpose of the transaction, with the result that the threshold for applying the PPT is relatively low. Consequently, the MLI has the potential to apply to a broad variety of structures and transactions, including structures where non-resident investors invest in Canadian resource and real property companies through foreign holding companies located in the Netherlands and Luxembourg. The Netherlands and Luxembourg foreign holding companies have been used extensively in the past by persons who are residents of non-treaty jurisdictions, as well as residents of treaty jurisdictions where the tax treaties do not provide relief from Canadian taxation on the gain realized by a non-resident from the sale of Canadian resource and real property companies, because the tax treaties between Canada and each of the Netherlands and Luxembourg provide that "immovable property" does not include property in which the business of the company is carried on. The tax treaties between each of the Netherlands and Luxembourg and Canada are Covered Tax Treaties for purposes of the MLI. As a result of the imminent implementation of the MLI, we have developed tax efficient structures for non-treaty and treaty resident investors in Canadian resource and real property companies which should not run afoul of the PPT and can be implemented not only for new investments, but also to restructure existing foreign holding structures so they are PPT compliant.

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