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 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.
- 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.
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
Davies Ward Phillips & Vineberg LLP, Montreal