15 September 2020 IFA Online Seminar - Finance Update
This briefly summarizes some of the comments made by Brian Ernewein (General Director, Legislation, Tax Policy Branch, Department of Finance) at the Finance Update session held at the webinar hosted by the International Fiscal Association (Canadian branch) on 15 September 2020 (a Young Members Event).
Pending/potential Finance releases
It is unclear when the next Budget will be. It is possible that a Budget or, failing that, an economic statement, will be tabled this fall. It also is possible that all the COVID responses effectively will substitute for the 2020 Budget this year and that there will be a late winter or early spring Budget.
The 2018 Budget announced that CRA would no longer apply its administrative tax rules for health and welfare Trusts after 2020, and that such trusts would need to comply with the s. 144.1 ELHT rules starting in 2021. Finance is debating whether or not there would be utility in confirming the scope and application of the ELHT legislative framework, particularly in the context of such trusts, before the end of the year.
Depending on the continued severity of the pandemic, implementation of the second package of legislative proposals to implement the 2019 budget could occur in the fall or be pushed over until 2021. Similarly, it is unclear whether the next technical amendments package will be released before the end of the year – if not, Finance will try to find the space for a package in 2021, ideally in the first half.
Questions were fielded in advance from IFA members regarding the MLI:
Q.1 MLI reservations
Is Canada satisfied with its current reservations under the MLI? Are there any plans for Canada to amend any of its positions?
A: The choice made by Canada to adopt or not adopt any particular optional provision was informed by a number of factors including the potential impact and the interaction between the MLI provision and domestic tax policy. The MLI also is a one-way door respecting reservations: a country can remove a reservation following ratification, but is not allowed to adopt a reservation except in the course of ratification. Accordingly, Canada effectively erred on the side of caution in adopting four or five of the possible optional provisions in the MLI. However, it would be wrong to assume that Canada rejects any of the other optional provisions, which could be adopted either in bilateral treaty negotiations, or through withdrawal of MLI reservations. That said, it has been less than a year since Canada actually ratified and stated its initial positions regarding the optional provisions, and is not obligated in the short term to revise its positions.
Q.2 Stance on LOBs
Is Canada actively looking to negotiate a comprehensive limitation on benefits (“LOB”) clause in any of its tax treaties or is there simply a willingness to consider comprehensive LOB provisions wherever requested by our treaty partners?
A: Under the MLI itself, Canada stated that while it accepts the application of the principal purpose test (PPT) as in interim measure, it intends where possible to adopt all limitations of benefits provisions in addition to or in replacement of the PPT through bilateral negotiations. Canada generally continues to subscribe to this view and would consider seeking inclusion of a comprehensive LOB in revised treaties. It is something that Canada would probably look to discuss in every treaty negotiation. That is not to say that Canada would insist on an LOB in every case or would even agree to the LOB that the other country wanted in every case. That will depend on the context, for example, the country in question, and whether the negotiation is on a new treaty or updating an existing one. However, there are treaties where Canada would seek to include a comprehensive LOB.
Q.3 German/Swiss Treaty negotiations
When Canada signed the MLI, it simultaneously announced treaty negotiations with Germany and Switzerland. Are those negotiations progressing and can Canada generally continue to negotiate tax treaties during the current pandemic?
A: We continue to advance work on several treaty negotiations including those with Switzerland, Germany and Brazil. In these negotiations, one of the objectives is to incorporate the BEPS minimum standards. Brazil has not signed the MLI, so that bilateral negotiation is required in its case - and Switzerland and Germany have signed the MLI, but have indicated a preference for bilateral protocols to update their respective treaties. We hope to confirm soon that we will be entering into talks with Norway with the same objective of implementing the BEPS minimum standards.
Q.4 MLI Treaty arbitration
Is any further work being done to clarify how arbitration processes will work with Canada’s treaty partners under the MLI, particularly where there is no match on the form of arbitration to be followed?
A: This is a question for CRA. It is responsible for the implementation of arbitration under tax treaties including the MLI and is working on developing a model competent authority agreement in this regard. The more difficult issue arises where Canada and the matched partner have chosen different forms of arbitration. That can only be resolved by CRA with the other competent authority.
Pillars One and Two
Comprehensive and substantive documents should be released in October on the two Pillars. The steering group also discussed last week consultation on both Pillars, although that is a decision for the inclusive framework to make.
The reports will each identify a rather long list of issues on which differences have yet to be resolved. Many of these are essentially political-level questions, for example, whether Pillar One can or should apply on an elective basis, as the US now proposes, what the rate of the global minimum tax should be, and perhaps whether the U.S. GILTI should be accommodated. There is also an important list of lesser but very important design questions that need to be sorted out. There is a real question as to whether agreement can be achieved on both Pillars, or either Pillar, this year.
There remains a strong interest on the part of a large number of countries, including Canada, to get agreement on both Pillars. Reflecting that interest, intensive work on landing each of these proposals in going to continue beyond the end of this year and well into the next.
The idea of Pillar Two (the global minimum tax, which can be analogized to the CFC rules or the US GILTI) is conceptually more familiar than what is being discussed under Pillar One, and there is a sense that it is more likely that agreement can be reached on the technical design of the Pillar Two measure ahead of Pillar One. It is understood that the U.S. is supportive of Pillar Two, which is perhaps not surprising given its own adoption of GILTI.
The design issues for Pillar One seem more challenging, but there could possibly be agreement on it as well, either on digital alone (which some of us think of as the more core issue, and for which there is a better policy argument), - but also, with some greater difficulty, on the consumer based businesses basis. The biggest challenge with Pillar One appears to be the lack of clarity of the US commitment to it. The position expressed by the U.S. last December by the Treasury Secretary - that they would support the adoption of Pillar One only on an elective basis, does not appear to be a workable approach, and if the U.S. insists on that position, it is difficult to see how agreement could be reached on Pillar One.