Canada: Multilateral Instrument Update

Last Updated: January 17 2018
Article by Steven Baum and Laura Gheorghiu

This article updates developments relating to the Multilateral Convention to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which were discussed at the 2017 annual conference of the Canadian Tax Foundation, held in Toronto in mid-November. This update represents our understanding of Finance's and the CRA's preliminary positions; the reader should also refer to subsequent Foundation articles and official written materials from Finance and the CRA.

Coming into effect

OECD representatives announced that five countries are expected to ratify the MLI by the end of 2017 (five-country ratification is the first step in the MLI's coming into effect), but only Austria and the Isle of Man have ratified the MLI to date.

The tabling of the MLI in the Canadian Parliament, which is the first step toward Canadian ratification, has not yet occurred. Finance's Stephanie Smith gave sample timelines for the MLI's coming into effect in Canada. If ratification is completed by the summer of 2018, the MLI will come into effect for withholding taxes on January 1, 2019; for all other taxes, in a taxpayer's first taxable period beginning after 2018 (on January 1, 2019, if the taxpayer's taxation year is the calendar year). However, if the MLI is ratified later in the year (for example, in November 2018), the MLI will still come into effect for withholding taxes on January 1, 2019; for all other taxes, on January 1, 2020 (assuming, again, a calendar year-end).

Finance noted that there will be no public consultation before the MLI is ratified. Furthermore, the government will not provide consolidated official versions of the MLI and affected tax treaties; a taxpayer may of course use, but should not rely on, commercial publishers for consolidated versions.

Canada's reservations

Finance also said that Canada's adoption of the MLI's minimum standards but not of the optional provisions (for example, the artificial avoidance of PEs) should not be interpreted as the country's final policy choices. Canada may not have had adequate time to fully consider other provisions before announcing preliminary reservations in June 2017: Canada may amend its reservations on ratification or it may address these issues in a bilateral treaty's renegotiation. To this end, the OECD representatives announced that the 2017 draft update to the OECD model treaty and commentary—an update that contains bilateral treaty provisions similar to those in the MLI—has been approved and will be available in December 2017. Canada's reservations on that update will therefore be instructive.

Furthermore, Finance indicated that, as more countries join the ad hoc group for the development of the MLI, Canada may expand its list of covered tax agreements (CTAs) for the purposes of the MLI. The OECD representative announced that, to date, 71 countries have signed the MLI and that more countries will become signatories when a further signing ceremony occurs in January 2018. Canada may add some of the additional countries to its CTA list for MLI purposes.

Uncertainty of the PPT's application

The Foundation's 2017 annual conference showed that there is consensus about the need to address the interpretive challenges posed by the principal-purpose test (PPT) and the minimum standard for the anti-treaty-shopping rule. At the CRA round table, the CRA's Stéphane Prud'homme, in response to a query, said that the CRA is considering how to promote the consistent application of the PPT within the agency; a committee for this purpose may be struck, modelled on the existing GAAR committee.

Furthermore, it is not clear that the interpretation of the PPT will be consistent with existing GAAR case law relating to "object and purpose"; the uncertainty is due to the differences between the PPT and GAAR, the potential domestic implementing legislation, and the treaty preamble to be adopted by the MLI. The CRA also indicated that the PPT and GAAR may be alternative assessing positions in respect of certain treaty-abuse arrangements. Importantly, the CRA indicated its readiness to issue PPT rulings when the rules are in effect.

Under Canada's current reservations to the MLI, PPT disputes cannot be arbitrated. Finance said that this choice was made because Canada's arbitration model—"best-offer" (or "baseball-style") arbitration—is better suited to factual than to legal questions such as the PPT's application. As a consequence, if a PPT assessment cannot be overturned in the courts, any resulting double taxation not addressed under the mutual agreement procedure (MAP) may remain double taxation.

Taxpayers that are relying on treaty benefits must closely follow developments in ratification and the general application of the PPT and the MLI.

This article was first published in Candian Tax Highlight (dec. 2017) and is published here with the original publisher's authorization.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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