Finance official indicates that the PPT should be applied before GAAR

Stephanie Smith provided various MLI-related comments, including several noted below:

• The Canadian MLI implementing bill provides that, to the extent of any inconsistency between the provisions of the MLI (e.g., the principal purpose test (“PPT”)) and those of the Income Tax Convention Interpretation Act, the latter (the “ITCIA”) will prevail. S. 4.1 of the ITCIA provides that “notwithstanding the provisions of a Convention … the GAAR, applies to any benefit provided under the Convention.” The intention is that 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 any application of the PPT, s. 4.1 ensures that the benefit can be subject to the application of GAAR. Thus, the correct order of application is: PPT 1^st; GAAR 2^nd.
• Approximately 20 of Canada’s treaties will be updated to include arbitration. Of those 20, 13 counties have agreed to Canada’s preference for baseball-style arbitration (e.g., Australia, France, Italy and Spain) and seven (e.g., Sweden and Japan) have indicated their preference for independent opinion. For those seven, further negotiation is needed.
• When the Notice of Ways and Means motion for the implementation of the MLI was tabled, Canada indicated that it would adopt additional provisions of the MLI including the tie-breaker rule for dual-resident entities, so that about 23 of Canada’s tax treaties are expected to be updated with that rule. Many of Canada’s tax treaties already have that rule, so this will result in that provision covering almost all of Canada’s treaty network.
• Finance is hopeful that Canada will be among the additional jurisdictions that will deposit their MLI instruments of ratification by the end of 2019. There are a number of procedural steps still to go.
• Finance is in the course of preparing “synthetic” unofficial Treaty texts, i.e., consolidations that show the effect of the application of the MLI to each covered tax treaty.

Neal Armstrong. Summaries of 14 May 2019 IFA Conference – Stephanie Smith on MLI – GAAR and PPT under Treaties – MLI – Art. 7(1), Art. 19 and Art. 4.