CRA comments on the PPT application to a treaty-reduced dividends of Canco paid to a pure Holdco with an ultimate Treaty-resident parent

CRA was asked how the principal purpose test (PPT) in Art. 7(1) of the MLI) would apply in the situation where:

Canco is wholly-owned by a Foreign Entity (FE) and FE is owned by a foreign multinational (Foreign MNC). Foreign Entity (FE), with no employees and only holding shares of Canco, enjoys a treaty-reduced rate of 5% on its dividends from Canco under the relevant “Treaty 1” with Canada (a Covered Tax Agreement) and, in turn, is wholly-owned by Foreign MNC, who also would enjoy a reduced 5% withholding tax rate under “Treaty 2” had it received Canco dividends directly.

A variant of this situation was the same except that a holding company (HC), resident in a non-treaty country, was interposed for non-tax reasons between Foreign MNC and FE – but with the funding for the acquisition of the Canco shares still having come from Foreign MNC.

CRA indicated that it wished to provide only general comments which, regarding the first Situation, included:

• Regarding the transaction “principal purpose” element of the PPT, the OECD Commentary on Art. 29 in paras. 178-79 indicates that this is an objective/subjective determination which include an examination of the surrounding facts, with reasonable inferences therefrom.
• Here, the relevant factors were that FE is a pure holding corporation with no employees and that both Treaties provided a 5% withholding rate.
• Regarding the “object and purpose” part of the PPT test, para. 174 of the OECD Commentary on Art. 29 gives some indications that the treaty is meant to provide benefits in respect of bona fide exchanges of goods and services, and movements of capital and persons, as opposed to arrangements whose principal objective is to obtain favourable tax treatment.
• Another element that might inform the object and purpose part of the test is whether FE is a genuine resident of the Treaty 1 country.
• Also relevant is that the Treaties provide a reduction to a 5% dividend rate.

The same considerations would be relevant for the variant Situation. The initial factors here might be the timing of the transaction (when was HC introduced into the structure), the non-tax reasons for the structure, and any other judicial doctrines, provisions or treaties which might be relevant.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.7 under Treaties – MLI – Art. 7(1).