Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principales Questions: Can the CRA provide examples of (A) any fact patterns on which rulings have been requested or granted under the MLI and (B) any fact patterns on which the CRA has applied the PPT (and whether the CRA also applied GAAR in those situations)?
Position Adoptée: General comments provided.
Reasons: The Income Tax Rulings Directorate has not yet been asked to provide an advance income tax ruling on the application of the PPT as introduced by the MLI, and the CRA has not yet audited taxation years in which the changes to tax treaties introduced by the MLI are in force and effect.
2020 Canada Tax Foundation
Question 6: Multi-Lateral Instrument and “Principal Purpose” Test
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) became effective January 1, 2020, for many of Canada’s income tax treaties. Among other provisions, the MLI contains an anti-avoidance rule (often referred to as the principle purpose test (PPT)). Unfortunately, there has been limited guidance on the specific situations in which the PPT may (or may not) apply. Moreover, it remains unclear the extent to which the PPT will be administered and applied in a manner similar to that of Canada’s domestic general anti-avoidance rule (GAAR).
Can the Canada Revenue Agency (CRA) provide examples of:
A. any fact patterns on which rulings have been requested or granted under the MLI; and
B. any fact patterns on which the CRA has applied the PPT (and whether the CRA also applied GAAR in those situations)?
Canada has a longstanding, consistent and clear policy of preventing base erosion and international profit shifting. The CRA supports that policy inter alia through its administration of:
- s. 17, 18(4), 95, 212(3.1) to 212(3.94), 212.3 and 247 of the Income Tax Act (ITA);
- s. 245 ITA to deny treaty benefits in cases of treaty abuse, as clarified through the retroactive amendment made in 2005 to the definition of “tax benefit” in s. 245(1) ITA and to s. 245(4) ITA and the enactment of s. 4.1 of the Income Tax Conventions Interpretation Act; and
- limitation on benefit and anti-avoidance provisions in different treaties.
The Government of Canada 2014 Budget entitled “The Road To Balance: creating Jobs and Opportunities” included a section “Addressing International Aggressive Tax Avoidance by Multinational Enterprises.” That section indicated that “Canada’s tax rules must constantly be reviewed to ensure that they maintain an appropriate balance between the objectives of competitiveness, simplicity, fairness, efficiency and protection of the tax base.” In that spirit, it made reference to the Organization for Economic Co-operation and Development’s (OECD) base erosion and profit project shifting (BEPS):
Other countries share Canada’s recognition of the importance of an effective international tax system. In February 2013, the Organization for Economic Co-operation and Development (OECD) launched a project on base erosion and profit shifting (BEPS). The project aims to address international tax planning strategies used by multinational enterprises to inappropriately minimize their taxes, for example, by shifting taxable profits away from the jurisdictions where the economic activity has taken place. […] These multilateral efforts are consistent with the Government’s ongoing commitment to protect the Canadian revenue base and ensure tax fairness.
In keeping with that internationally shared objective of addressing base erosion resulting from the abuse of international tax treaties, Canada, along with over 100 other jurisdictions, undertook the completion of the BEPS, including the creation and implementation of the MLI in 2016. As of September 2020, 94 jurisdictions, including Canada, have signed the MLI which modifies numerous tax treaties to include a general anti-abuse rule in the form of the PPT and to update the preamble to those treaties to unequivocally state that they are for the purpose of eliminating double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping).
For the purposes of providing interpretive guidance on the application of the PPT, thirteen examples were included in the 2015 OECD’s Action 6 Final Report – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (pages 57 to 64): https://read.oecd-ilibrary.org/taxation/preventing-the-granting-of-treat.... These and other examples of the application of the PPT are now laid out in the Commentary to Article 29 of the OECD Model Tax Convention at paragraphs 182 and 187: https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-a.... In adopting the most recent version of the Model Tax Convention, no country registered an objection, reservation, or position against the PPT or the relevant interpretive guidance concerning its application in the Commentary. As a result, the CRA will look to this guidance for assistance in interpreting and applying the PPT.
Much of the concern expressed about uncertainty and the potential application of the PPT appears to center around questions as to the necessary indicia to support or rebut a reasonable conclusion that a transaction or arrangement had a principal purpose of obtaining a benefit under a tax convention, or what is required to establish that granting the benefits would nevertheless be in accordance with the relevant provisions of the convention in the particular circumstances.
As explained in paragraphs 178 to 181 of the OECD Commentary to Article 29, these questions are highly fact-dependent and linked to the particular taxpayers and their motives as well as the specific tax convention and the provisions and benefits thereunder in question.
In determining whether any arrangement or transaction has, as one of its principal purposes, the obtaining of a treaty benefit, the CRA would seek to ask a number of questions, including but not limited to:
- What are the direct and indirect results of the arrangement?
- What are the terms of the arrangement and do they lead to its results?
- What actions were undertaken to carry the arrangement into effect?
- What do the circumstances surrounding the arrangement, the way in which it was implemented, as well as its terms, indicate about the arrangement and its intended results?
- Could the non-tax objectives of the arrangement be achieved some other way? If so, is the arrangement more complex, more costly (not considering the tax benefit), or contain more steps than is necessary to achieve the non-tax objectives?
- Does the arrangement entail the use of hybrid entities, flow-through arrangements, or back-to-back transactions?
- Does the arrangement involve a change of residence or applicable tax convention?
- What are the non-tax benefit purposes for establishing each of the relevant entities or actions in each relevant jurisdiction?
- Is the existence of any entity or action in the arrangement explainable only if it is principally concerned with obtaining the relevant benefit?
- Absent any tax benefit, are there quantifiable financial benefits arising from the arrangement?
- Is there a discrepancy between the substance of what the arrangement achieves and its legal form?
- Does the arrangement result in a change in nature of payments?
- Does the arrangement result in the avoidance of a specific taxing rule? For example, does it avoid the existence of a permanent establishment or to avoid a test which would otherwise limit access to a benefit?
The above questions may also be relevant in respect of the GAAR for taxation years currently audited.
The Income Tax Rulings Directorate has not yet been asked to provide an advance income tax ruling on the application of the PPT as introduced by the MLI, and the CRA has not yet audited taxation years in which the changes to tax treaties introduced by the MLI are in force and effect.
The CRA has confirmed at the 2019 CTF Conference round table the creation of its Treaty Abuse Prevention Committee (TAP Committee). The TAP Committee will provide recommendations to the CRA on the administration of the GAAR in a tax treaty context and of the general anti-avoidance rule introduced by the MLI. We note that the Supreme Court of Canada recently granted leave to the Crown in The Queen v. Alta Energy Luxembourg S.A.R.L., (footnote 1) involving the potential application of the GAAR to a benefit claimed by the taxpayer under the Canada-Luxembourg Tax Convention.
As with the GAAR, in deciding on any application of the PPT to a particular case, the CRA will diligently and fairly fulfill its role to administer the provisions of the Income Tax Act as informed by the application of tax treaties in light of their object, spirit and purpose in keeping with the interpretation guidelines provided by the Courts.
October 27, 2020
En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous :
1 2020 FCA 43.
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