MLI Implementation in Canada

new-york-690868_1920On May 28, 2018, nearly a year after Canada became a signatory to the OECD’s Multilateral Instrument (“MLI”), a notice of ways & means motion has been tabled by the Minister of Finance (Canada) in the House of Commons signalling the Canadian government’s intention to introduce legislation to ratify the MLI.  On June 20, 2018, Bill C-82, which will enact the MLI, received first reading in the House of Commons. The MLI has been signed by 78 countries including Canada.

When the MLI is ratified by Canada and the other signatories, existing bilateral tax treaties may be modified to apply certain agreed to minimum standards  on treaty abuse and improving dispute resolution that were endorsed by participating countries under the OECD /G20 Base Erosion and Profit Shifting (BEPS) Project.

While Canada initially confirmed its support of the new treaty abuse rule and mandatory binding arbitration in respect of treaty based disputes between tax jurisdictions (similar to the provision in the Canada-U.S. Tax Convention), the Department of Finance (Canada) registered reservations on all other provisions in the MLI.   However, with the tabling of the notice of ways & means motion, Canada announced that it now intends to adopt three additional provisions of the MLI:

  • impose a 365-day holding period for shares of Canadian companies held by non-resident companies. The holding period will ensure that the lower treaty-based rate of withholding tax on dividends will not be available to non-resident companies that engage in certain short-term share acquisitions;
  • impose a 365-day test period for non-residents who realize capital gains on the disposition of shares or other interests that derived their value from Canadian immovable property. The test period will guard against certain transactions designed to obtain a treaty-based exemption from Canadian taxes on capital gains; and
  • incorporate the MLI provision for resolving dual resident entity cases. This provision employs an effective approach to resolving dual resident cases to prevent potential double taxation, while providing protection against companies and other entities that attempt to manipulate their tax residence to avoid or reduce their taxes.

If the MLI is ratified in Canada in 2018, the earliest that its provisions could apply to Canada’s tax treaties with treaty partners that have also ratified the MLI is January 1, 2020 for withholding taxes and for all other taxes, for tax years beginning after June 30, 2019.

In the meantime, taxpayers and their advisers remain understandably concerned about how the treaty abuse provisions of the MLI will be applied in practice.  In response to these concerns, the OECD is working on a project designed to encourage tax administrations to act reasonably when interpreting and applying the “principal purpose test”.  In November, 2017, the Canada Revenue Agency indicated that it was considering establishing an internal committee of tax experts, similar to the GAAR committee, to consider cases where auditors propose to apply the principal purpose test to better ensure the consistency of its application.  However, until the  courts begin to render decisions applying the principal purpose test, uncertainty will continue to be a hindrance to international tax planning.


Christopher Steeves is the Leader of Fasken Martineau's Tax practice group and is based in Toronto.