3 December 2019 CTF Annual Conference - Department of Finance Update

This provides a summary of a few of the comments made by Ted Cook (Director General, Tax Legislation Division, Finance Canada) at the Update provided by him in an oral presentation in Montreal at the 3 December 2019 Annual Canadian Tax Foundation Conference.

MLI signatories and unofficial synthesized treaty texts

The MLI was first signed in 2017, its instrument of ratification was deposited on 29 August 2019, it came into force on 1 December 2019, and it will have effect as soon as 1 January 2020.

There are currently 92 signatories to the MLI, and it is expected that 67 of Canada’s tax treaties will be covered by the MLI. 24 of these treaties as covered tax agreements will come into effect in January 2020, including for:

  • Australia;
  • France;
  • India;
  • Japan;
  • Luxembourg;
  • the Netherlands; and
  • the UK.

More of Canada’s tax treaties will become covered by the MLI based on their ratification.

The MLI is not an amending protocol. It operates alongside the existing treaties. Finance is preparing an unofficial synthesized text to assist in understanding the impact of the MLI on Canada’s tax treaties. We plan to post them on the Finance website.

Finance is consulting with its partner jurisdictions in preparing these texts, and many other countries are preparing theirs as well. Most of these texts will follow the OECD model, with variations for individual countries. Finance hopes to have the first group of these synthesized texts posted in early 2020.

For treaties that are not covered by the MLI, we have been working on updating them through bilateral negotiations, with a priority on states that have agreed to BEPS minimum standards. Canada is currently negotiating with Brazil, Germany, Norway, and Switzerland.

Comfort letter regarding s.212.1 and graduated rate estates

The Department of Finance is issuing a new comfort letter.

Section 212.1 is intended to prevent a non-resident shareholder from entering transactions that allow the shareholder to extract corporate surplus tax-free, or artificially create PUC in a Canadian-resident corporation.

In 2018, Finance introduced measures in the budget implementation act to ensure that the rule did not get frustrated by transactions involving partnerships or trusts.

People have raised concerns with Finance regarding the application of the look-through rule in s. 212.1(6)(b) to a Canadian-resident graduated rate estate with one or more non-resident beneficiaries. The concern is that this look-through rule will reduce the ability of the estate to implement some post-mortem tax-planning transactions that are otherwise commonly undertaken.

We agree that, for graduated rate estates, the application of s. 212.1(6)(b) can give rise to results that are inconsistent with current tax policy.

Therefore, we intend to recommend to the Minister of Finance that the Act be amended to exclude, from s. 212.1(6)(b), dispositions of shares by a Canadian-resident graduated rate estate of an individual who is resident in Canada immediately before the individual’s death, as long as the shares were acquired by the estate on, and as a consequence of, the death.

We will also recommend that the amendment apply beginning 26 February 2018.

We are in the process of preparing comfort letters to that effect to a number of advisors. We are also communicating these intentions to the Joint Committee on Taxation. We understand that the letter will soon be posted on the Joint Committee page on CPA Canada’s website. It will also be released under Access to Information in due course.