National Post (National Edition) - - Front Page - JULIUS MELNITZER

For­eign­ers look­ing to Canada as a tax haven and Cana­di­ans seek­ing havens abroad will have to deal with a whole new set of rules when the Or­ga­ni­za­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment’s Mul­ti­lat­eral In­stru­ment (MLI) rule takes ef­fect Dec. 1.

“For­eign in­vestors will have to re­think the ex­tent to which their in­vest­ments will be sub­ject to Cana­dian tax and the ex­tent to which it af­fects their re­turn on in­vest­ments and on their dis­po­si­tion,” says Dar­ren Huep­pelsheuser, a tax lawyer in Nor­ton Rose Ful­bright Canada LLP’s Cal­gary of­fice.

“A lot of op­por­tu­ni­ties for tax-ad­van­ta­geous struc­tur­ing will no longer be avail­able to for­eign in­vestors in Canada — and for that mat­ter, to Cana­dian com­pa­nies in­vest­ing abroad in the coun­tries (that) have adopted the MLI.”

The MLI re­quires par­tic­i­pat­ing coun­tries that have signed the agree­ment to in­clude the min­i­mum stan­dards against treaty shop­ping and abuse found in the OECD’s Base Ero­sion and Profit Shift­ing (BEPS) project in “cov­ered tax agree­ments” (CTA) — in which both par­ties to a dou­ble tax­a­tion treaty have rat­i­fied the MLI and no­ti­fied the OECD that their agree­ment is “cov­ered”.

Most sig­nif­i­cantly, the MIL mod­i­fies all CTAs by in­cor­po­rat­ing a broad anti-avoid­ance rule known as the prin­ci­ple pur­pose test (PPT). The PPT pro­vides that treaty ben­e­fits may be de­nied where it’s rea­son­able to con­clude that one of the prin­ci­pal pur­poses of any trans­ac­tion was to ob­tain such a ben­e­fit.

The most ob­vi­ous ex­am­ple in­volves the use of tax avoid­ance struc­tures or ar­range­ments such as hold­ing or shell com­pa­nies set up “prin­ci­pally” to take ad­van­tage of a dou­ble tax­a­tion treaty.

To date, some 89 ju­ris­dic­tions that are par­ties to more than 1,400 dou­ble tax­a­tion treaties have signed the MLI, and 26 (in­clud­ing Canada) have for­mally rat­i­fied them.

Five of Canada’s most im­por­tant trade part­ners in 2018 — China, the United King­dom, Ja­pan, Mex­ico, and South Korea — have signed the treaty al­though only the U.K. and Ja­pan have rat­i­fied so far.

Canada has ad­vised the OECD that it is amenable to hav­ing 84 of its 93 dou­ble tax­a­tion treaties sub­ject to the MLI when and if the var­i­ous coun­tries in­volved also rat­ify them and des­ig­nate them as CTAs.

No­table ex­cep­tions are the United States, Ger­many and Switzer­land, with whom Canada has dou­ble tax­a­tion treaties but who have not signed the MLI. How­ever, Canada has en­gaged these coun­tries in bi­lat­eral treaty ne­go­ti­a­tions that are ex­pected to mir­ror the con­ven­tion’s pro­vi­sions.

Ecuador, Guyana, Kyr­gyzs­tan, Tai­wan, Uzbek­istan and Venezuela are the other coun­tries that have treaties with Canada but are not MLI sig­na­to­ries.

The up­shot is that, as of Jan. 1, 2020, the MLI will af­fect with­hold­ing taxes un­der Canada’s tax treaties with coun­tries that have rat­i­fied the MLI. It will im­pact other taxes, in­clud­ing cap­i­tal gains taxes, for the tax year be­gin­ning on or af­ter June 1, 2020. Other treaties will be af­fected when Canada’s part­ners rat­ify the MLI.

What is cer­tain is that the im­pact on with­hold­ing taxes could be sig­nif­i­cant.

“If the treaty ben­e­fits don’t ap­ply be­cause of the PPT test, the with­hold­ing tax in the case of div­i­dends could rise from as lit­tle as five per cent to 25 per cent,” Huep­pelsheuser says. “So in some cases it may be bet­ter for in­vestors to struc­ture their in­vest­ments to pro­duce an in­ter­est stream rather than a div­i­dend stream.”

Ac­cord­ing to the lawyer, for­eign in­vestors with in­her­ent gains who may be caught by the MLI should at least look into sell­ing their in­ter­ests be­fore the con­ven­tion takes ef­fect.

“While the MLI is not retroac­tive, it does cap­ture the en­tirety of the gain on the date of dis­po­si­tion,” Huep­pelsheuser says.

But the big­gest is­sue may be the un­cer­tainty cre­ated by the PPT.

“It’s not at all clear how Cana­dian courts will deal with PPT and its ef­fect on our GAAR (gen­eral anti-avoid­ance rule), which our courts have in­ter­preted for decades and whose ap­proach we un­der­stand,” says Pa­trick Mar­ley, a tax lawyer in Osler, Hoskin & Har­court LLP’s Toronto of­fice. “There’s also some con­cern about how Cana­dian courts will deal with for­eign de­ci­sions in­ter­pret­ing the MLI, be­cause the iden­ti­cal rule will be found in many treaties.”

What’s ap­par­ent is that the MLI is al­ready in the Canada Rev­enue Agency’s (CRA) crosshairs.

“When Cana­dian busi­nesses re­ceive tax ad­vice, (they) should take the po­ten­tial ap­pli­ca­tion of the MLI into con­sid­er­a­tion,” the CRA stated in an email.

With re­gard to the in­ter­play of GAAR and PPT, the CRA points out that Cana­dian GAAR ap­plies to “any ben­e­fit” pro­vided un­der a tax treaty.

“In ap­pro­pri­ate cir­cum­stances, the prin­ci­pal pur­pose test in the MLI and the Cana­dian GAAR could ap­ply as al­ter­na­tive as­sess­ing po­si­tions to a given trans­ac­tion or ar­range­ment,” the agency states. “The CRA has not yet had to con­sider the ap­pli­ca­tion of the prin­ci­pal pur­pose test in the MLI in con­junc­tion with the Cana­dian GAAR. Such a de­ter­mi­na­tion will de­pend on the specifics of the case.” Mar­ley dis­agrees.

“The PPT rule as drafted is not too dif­fer­ent from the Cana­dian rule, so we hope that they will be in­ter­preted in a con­sis­tent man­ner,” he says. “And if the two are meant to be in­ter­preted in a con­sis­tent man­ner, there is no rea­son to ap­ply both at the same time”

Mean­while, Huep­pelsheuser sug­gests that tax­pay­ers re­ly­ing on a Cana­dian bi­lat­eral tax treaty should con­sider which treaties they rely upon; which pro­vi­sions of the MLI are ap­pli­ca­ble; the ex­tent of the new with­hold­ing obli­ga­tions; whether proac­tive steps such as re­struc­tur­ing or re­or­ga­ni­za­tion can im­prove tax ef­fi­ciency af­ter the MLI’s ef­fec­tive date; and con­tinue to mon­i­tor the sta­tus of CTAs “as these will con­tinue to change and may have fu­ture im­pact”.


Many coun­tries that have dou­ble-tax­a­tion treaties with Canada are not sig­na­to­ries to the MLI.

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