Canada Takes Additional Steps on Implementing the MLI

written on behalf of Feigenbaum Law

Earlier this year, the federal government introduced Bill C-82 (An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting). The Bill passed first reading in the House of Commons in June. If passed, it will bring into force the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing (also known as the MLI).

What is the MLI?

The MLI is intended to update international tax rules and decrease the opportunity for tax avoidance by multinational enterprises through base erosion and profit sharing (BEPS).

The MLI entered into force in July 2018 and currently covers more than 75 jurisdictions, other jurisdictions have indicated their intention to sign the MLI as soon as possible and/or are working towards signature. Canada signed the MLI at the MLI ceremony in Paris, France in June 2017.

The MLI will modify up to 75 of Canada’s current tax treaties (i.e. Covered Tax Agreements).

Base Erosion and Profit Shifting (BEPS)

BEPS is a tax planning strategy that takes advantage of tax rules in order to artificially transfer a company’s profits to jurisdictions with lower tax rates but where the company has no significant activity.

Canada and the MLI

Canada’s approach to the MLI was initially conservative. When Canada signed the MLI it only adopted the minimal standards with respect to tax treaty abuse and the mandatory binding arbitration provision.

Minimal Standards

The minimal standards initially adopted by Canada included a new tax treaty preamble, an anti-abuse rule, and implementation of dispute resolution processes.

The preamble (i.e. the statement of purposes of a treaty) clarifies that the Covered Tax Agreement is intended to eliminate double taxation without creating opportunities for either non-taxation or reduced taxation through tax avoidance or evasion.

The anti-abuse rule is intended to deny a benefit under a tax treaty where one of the principal purposes of an arrangement is to obtain that benefit (unless the granting of the benefit happens to be in accordance with the purpose of the treaty).

Mandatory binding arbitration obligates parties to a tax treaty to submit any unresolved disputes to an impartial arbitration panel, with the effect of a binding decision being reached. The mandatory binding arbitration procedure adopted via the MLI will be substantially the same as the mandatory procedure in the Canada-United States Tax Convention.

Optional Provisions

More recently, the Ministry of Finance indicated that Canada now intends to adopt a number of the MLI’s optional provisions, including three that work to eliminate opportunities for taxpayers to avoid or reduce their taxation.

The new provisions:

• Impose a 365-day holding period for any shares of Canadian companies held by non-resident companies. This hold is intended to ensure that a lower tax rate of withholding tax on dividends will not be available to non-resident companies who acquire certain short-term shares;
• Impose a 365-day test period for non-residents who realize capital gains on the disposition of shares or other interests deriving value from Canadian land or real estate. The test period is intended to protect against transactions that are entered into to obtain a treaty-based exemption on Canadian taxes;
• Incorporate the MLI provision for dual residents. The provision resolves dual resident matters in a way that prevents possible double taxation while stopping companies and other entities from manipulating their tax residence as a means of avoiding taxes.

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.

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