Canada Goes Beyond the MLI's Minimum Standards

Bill C-82, tabled in Parliament on June 20, 2018 (An Act To Implement a Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion and Profit Shifting) represents the next step in Canada's implementation of the multilateral instrument (MLI). Canada intends to go beyond the MLI's minimum standards on treaty abuse and dispute resolution previously announced (see "The MLI: Canada Signs and Presents Its Choices," Canadian Tax Focus, August 2017). The MLI implements certain treaty measures outlined in the OECD's BEPS initiative without the need for treaty-by-treaty bilateral negotiations. Seventy-five of Canada's tax treaties are covered by the MLI; these are referred to as covered tax agreements (CTAs).

Canada intends to adopt three of the MLI's optional measures:
  • Canada's CTAs will be subject to a 365-day minimum holding period in order for a foreign shareholder to be entitled to a reduced withholding tax rate on dividends received from a Canadian subsidiary (article 8). This requirement will apply only to those CTAs that limit the taxation of dividends if the dividend recipient meets certain capital or voting-percentage thresholds. Changes of ownership resulting from a corporate reorganization are ignored in determining whether the holding-period requirement has been met.

  • Under most of its tax treaties, Canada has the right to tax capital gains from the disposition of shares (or other participation rights) if at least 50 percent of the shares' value at the time of disposition is derived from Canadian-situs real property. Canada has now opted in to an MLI measure that will subject such capital gains to tax in Canada when, at any time in the previous 365-day period, the value threshold set out in the applicable CTA is exceeded (article 9). This measure is intended to address situations in which assets are contributed to an entity with the sole purpose of diluting the value attributable to real property in contemplation of an immediate share sale.

  • Canada has lifted its reservation with respect to the measure aimed at resolving dual-resident entity cases (other than individuals) by mutual agreement of the competent authorities (article 4). If the competent authorities are unable to reach a mutual agreement, any relief or exemption under the CTA will be denied. Similar dual-residence rules already exist in most of Canada's tax treaties.

Canada had previously reserved its right to have these measures not apply to its CTAs, but that was a temporary step to allow it time to consider its options.

In its Backgrounder, Finance also stated its intention to adopt measures that would allow treaty partners to convert their framework for relieving double taxation from an exemption-based system to a foreign tax credit system. However, Finance has yet to specify which of the MLI's three alternative methods for the elimination of double taxation it intends to adopt (article 5). Canada has also left open the possibility of adopting additional measures when the MLI is ratified.

In Canada, the MLI will enter into force on the first day of the month following the expiration of a three-month period from the time Canada deposits its ratification instrument. Once the MLI is ratified by both parties to a CTA, its provisions with respect to the bilateral tax treaty in question will be rolled out in two stages. First, the MLI will apply to withholding taxes as of the first day of the next calendar year beginning on or after the later of the entry-into-force dates for the two parties to the CTA. In all other respects, the MLI will generally apply to taxes levied with respect to taxable periods beginning on or after the expiration of a six-month period following the later of the two entry-into-force dates. As of the beginning of July 2018, only seven countries that have CTAs with Canada have ratified the MLI.

Reuben Abitbol
Davies Ward Phillips & Vineberg LLP, Montreal

Canadian Tax Focus
Volume 8, Number 3, August 2018
©2018, Canadian Tax Foundation