2019 IFA Conference - Stephanie Smith on MLI

This provides abbreviated summaries of some of the answers and other comments given respecting the Multilateral Instrument (MLI) by Stephanie Smith, Director, Tax Treaties, Tax Legislation Division, Tax Policy Branch at the Department of Finance on May 14, 2019 at the IFA (Canadian Branch) annual conference in Montreal. Her comments answers were given as part of the Taxation of the Digital Economy Update session held on that day. The moderator was Michael Kandev (Davies), and the other presenters were Sophie Chatel (OECD, Head of Tax Treaty Unit), Julien Gayral (Bredin Prat SAS, Paris), and Mark Dumalski (Deloitte).

Stephanie's more extensive comments on matters that are further away from any imeplementation and on general international-progress related matters are not summarized.

MLI Progress

Canada originally listed 75 of its 93 tax treaties in its provisional notifications on signature. It is expected that Canada will have that number up to 84 when those notifications are finalized and deposited on ratification. That number represents all members of the inclusive framework and all those who have signed the MLI.

Canada will include the preamble and the principal purpose test (PPT) in its bilateral agreements.

When Canada issued its notifications, it stated that it was accepting the PPT on an interim basis, and that it intended, where appropriate, to negotiate a detailed limitation-on-benefits Article (LOB). The use of “interim basis” merely mirrors language appearing in the MLI itself, and was merely meant to signal to Canada’s treaty partners that it would seek to negotiate a detailed LOB where appropriate.

However, some of Canada’s treaty partners have been clear that their preference is for the PPT.

Approximately 20 treaties will be updated to include arbitration. Of those 20, 13 have agreed to Canada’s preference for last best offer (i.e. “baseball-style” arbitration) and seven have indicated their preference for independent opinion. For those seven, which include Sweden and Japan, further negotiation is needed. The 13 baseball-style partners include Australia, France, Italy and Spain.

When the Notice of Ways and Means motion for the implementation of MLI was tabled, Canada indicated that it would adopt additional provisions of the MLI including the tie-breaker rule for dual-resident entities. About 23 of Canada’s tax treaties are expected to be updated with that rule as a result of the MLI. Many of Canada’s tax treaties already have that rule, so this will result in the provision covering almost all of Canada’s treaty network.

Canada also indicated that it would pick up the requirement for a dividend holding period in respect of obtaining the lower rate on direct dividends. It is expected that approximately 22 of Canada’s treaties will be updated accordingly. Some of those 22 do not actually have a lower rate, so there would be no impact to picking up the provision.

For approximately 35 treaties there will be a match respecting the look-back period for real estate holding companies as to whether they derive their value primarily from real property.

Finance is hopeful that Canada will be among the additional jurisdictions that will deposit their instruments of ratification by the end of 2019. There are a number of procedural steps still to go.

Synthesized Treaty Texts

Canada intends to produce unofficial synthesized texts of its tax treaties. That is a time-consuming process, because for some treaties, the protocols first need to be consolidated before the synthesized version is produced. The more important trading partners will be given the firsts priority.


Question: How to the GAAR and PPT interact?

Smith: The implementing bill provides that, in the event of any inconsistency between the provisions of the MLI (the PPT, in this case), and the provisions of the Income Tax Convention Interpretation Act, the ITCIA will prevail to the extent of any inconsistency.

The reason for including s. 4(2) of the implementing bill was to clarify that the provisions of the MLI, like the provisions of all bilateral tax treaties to which the MLI applies, are subject to ITCIA. This is a provision that you will find in all Treaty- implementing legislation.

Turning now to the ITCIA itself, s. 4.1 states that “notwithstanding the provisions of a Convention or the Act giving the Convention the force of law in Canada, it is hereby declared that the law of Canada is that section 245 of the ITA, the GAAR, applies to any benefit provided under the Convention.”

Therefore, s. 4.1 clarifies that a benefit obtained under the terms of a tax treaty does not escape the scrutiny of GAAR. Covered tax conventions will be modified by the MLI once the implementing act receives Royal assent, such that the PPT is part of that Convention and should be applied like all other rules in the Convention.

The intention is that if the PPT applies, a benefit under the Convention will not be granted in respect of a particular item of income or capital. In other words, if the PPT applies, there will be no tax benefit under the Convention, to which the GAAR could apply.

Conversely, if there is a benefit under the Convention after the application of the PPT, s. 4.1 ensures that the benefit can be subject to the application of GAAR. Thus, the MLI will modify Canada’s covered tax agreements to restrict treaty benefits in certain circumstances. The restriction of these treaty benefits, whether through specific provisions of the MLI or through the PPT, is not in Finance’s view, inconsistent with section 4.1 of the ITCIA.