CRA suggests that a non-resident’s increasing its voting shareholding in Canco to access the Treaty-reduced dividend withholding rate does not engage the PPT

A UK-resident corporation increased its voting shareholding of Canco the day before a dividend was paid so as to hold 10% of the shares. How would CRA apply the principal-purpose test (PPT) in Art. 7(1) of the MLI in this situation? CRA noted:

• Example E of the 2017 OECD Commentary on Art. 29 describes the similar situation of a shareholder who is slightly below the threshold for access to the lower dividend rate, and who acquires shares for the purpose of taking advantage of the reduced rate. The view in the Commentary is that such transaction would be in accordance with the object and the purpose of Art. 10(2), which provides the reduced rate.
• This OECD answer was conditional on the taxpayer’s acquisition "genuinely increas[ing]" its participation in the company. CRA understood “genuinely increasing” to suggest that there be no manipulation of the shareholding in the form of transitory acquisitions where, for example, a person, holding 8% of the shares, bought just enough shares to exceed the threshold for accessing the 5% reduced rate and, right after the dividend, returned to its initial 8% shareholding.

CRA indicated that the PPT had supplanted Art. 10(8) of the Canada-UK Treaty, so that this answer nullified the adverse position in 2019-0792651I7.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.1 under Treaties – Income Tax Conventions – Art. 10.