Feigenbaum Law

An Update on Canada and the MLI: What’s Next as We Near the Date It Comes Into Force?

Corporate Tax Planning
Personal Tax Planning
October 11, 2019

The Organisation for Economic Co-operation and Development ’s Multilateral Instrument (MLI) is set to come into force on December 1, 2019. This new legislation is set to have an impact on both foreign investors in Canada as well as Canadian companies which invest in countries which have adopted the new law.

What is the MLI?

We originally blogged about the MLI last year.

The MLI is intended to decrease the opportunity for tax avoidance by multinational enterprises through base erosion and profit sharing (BEPS). Briefly, BEPS is a tax planning strategy which allows the artificial transfer of a company’s profits to jurisdictions with lower tax rates but where that company has no significant activity.

What Does the MLI Mean for Canada?

The MLI entered into force in July 2018. As of today’s date, almost 90 jurisdictions who are parties to more than 1,400 double taxation treaties (i.e. Covered Tax Agreements, or CTA’s) have signed the MLI. Many, including Canada, have formally ratified them.

Canada has advised the OECD that it is open to having 84 of its current 93 double taxation treaties subject to the MLI when the various other jurisdictions involved also ratify and designate these treaties as CTA’s.

The MLI modifies all CTA’s by incorporating the principle purpose test (PPT). The PPT is an anti-avoidance rule which stipulates that treaty benefits can be denied in situations where it’s reasonable to conclude that a principal reason for a transaction was to obtain a treaty benefit (e.g. where a shell or holding company is established to take advantage of a double taxation treaty).

What Happens Next?

As of January 1, the MLI will also impact withholding taxes under Canada’s tax treaties with countries that have ratified the MLI. This includes five of Canada’s most important recent trade partners: Mexico, the United Kingdom, China, Japan, and South Korea (although only the UK and Japan have ratified).

Additionally, the MLI will also impact other taxes, such as capital gains taxes, beginning on or after June 1, 2020. Further treaties will be affected as more of Canada’s various trading partners ratify the MLI.

It remains to be seen how Canadian courts will interpret the PPT moving forward, and there may now be a change in how this has been dealt with for many years, particularly as courts in foreign jurisdictions also grapple with new interpretations. Likewise, it will be interesting to see how the Canada Revenue Agency approaches this issue.

How Can Feigenbaum Law Help?

We will continue to monitor developments with respect to the MLI and will provide updates as they become available. In the meantime, if you have questions about how these standards and provisions may affect your tax planning, contact Feigenbaum Law.

At Feigenbaum Law our focus is Canadian and U.S. tax law, specifically the legal and financial complexities that arise when your money crosses the border. We offer a range of services in this highly niche area, providing skilled advice and solutions. Our goal is to create the best possible personal or corporate and cross-border tax strategy for each of our clients.  Our customized solutions streamline compliance requirements and set our clients up to take advantage of all possible current and future opportunities to reduce their tax burden.

Accountants and lawyers in both the U.S. and Canada routinely seek us out for assistance with complicated tax compliance issues. Our unparalleled knowledge of tax regimes in various jurisdictions makes us leaders in this field. As a client, you will have peace of mind knowing that your matters are being handled by industry leaders with years of experience. We know taxes can be stressful, so we work with you to make your tax experience as simple and worry free as possible.

Contact us to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.


Tagged: BEPs, corporate tax planning, MLI, personal tax planning