Canada’s adoption of the Multilateral Instrument (MLI), as part of the Base Erosion and Profit Shifting initiative, comes into force on 1 December 2019.

The introduction of the MLI amends a significant number of Canada’s tax treaties which will affect:

• Withholding taxes, beginning 1 January 2020
• Other taxes, for taxation years beginning on or after 1 June 2020.

The MLI effectively amends Canada’s tax treaties with each country that has already adopted the MLI and is expected to affect treaties with additional countries as they adopt the MLI, explain the Ecovis experts. Where a country ratifies and deposits the MLI with OECD, the MLI is expected to come into force on the first day of the month beginning 3 months after the country deposits its instrument of ratification with the OECD.

Each country will have adopted the minimum standards and can also choose to adopt or make reservations to specific provisions. As such, it is important to examine the “reservations and notifications” by each of the two countries when applying the MLI to each tax treaty.

Commitments by Canada

Canada’s adoption of the MLI provisions include:

1. Minimum standards:
2. Article 6: Stating the purpose of a Covered Tax Agreement to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
3. Article 7: Adding a general anti-avoidance principal purpose test to address treaty abuse in accordance with the OECD’s minimum standard.
4. Articles 16 to 26: Modifying dispute resolution procedures, including the adoption of mandatory binding arbitration procedures.

1. Additional provisions:
2. Article 4: Allowing specific treaty residence tiebreaker rules to be replaced with the MLI’s residence tiebreaker rules.
3. Article 8: Adding a one-year holding period test on the application of the reduced dividend withholding tax rate for corporations.
4. Article 9: Adding a one-year look back test on the application of treaty exemption on capital gains from disposition of shares (or other equity interests) that derive their value principally from immovable property.

Advice to clients

The MLI adoption can significantly impact the tax treatment of many cross-border arrangements and potentially result in denial of benefits in certain structures or transactions. Multinational businesses and their advisors need to review existing structures and cross-border transactions to ensure compliance with the new requirements and to avoid unintended tax results.

Author: Abigail Kan, CPA, CMA, Tax Principal, ECOVIS GCSE LLP, Toronto, Ontario, Canada