Jan 19, 2022
As we advised in Tax Tip 20-04 , significant additional disclosure and filing requirements for trusts were announced in the 2018 Federal Budget and are scheduled to apply for trust’s 2021 and subsequent tax years.
Author: Henry Shew, CPA, CA, TEP, CPA (Washington), MAcc
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP
The use of creative international structures by multinational corporations to transfer a significant portion of their global profits to low tax jurisdictions led the Organisation of Economic Co-operation and Development (“OECD”) to undertake the Base Erosion and Profit Shifting (“BEPS”) study. The study concluded with 15 proposed initiatives, one of which is to address potentially abusive use of tax treaties between countries to shift profits. Renegotiating individual treaties is not feasible and hence the multilateral instrument, formally called the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) was developed.
On June 7, 2017, Canada signed the MLI along with 67 other jurisdictions. As at today, there are a total of 89 signatories to the MLI. However, the U.S. did not sign the MLI as they believe their tax treaties have sufficient measures to mitigate exposure to BEPS.
The MLI is a multilateral treaty that modifies the effect and interpretations of all covered tax agreements (“CTAs”) between participating countries. Canada has designated 75 of its 93 bilateral tax treaties as CTAs. The MLI contains minimum standards that all participating countries must agree to adopt which deal with treaty abuse and improving dispute resolutions. Additional optional provisions or reservations can be adopted by participating countries.
One of the minimum standards adopted by Canada is the principal purpose test (“PPT”) in relation to treaty abuse. Under the PPT, treaty benefits will be denied if one of the principal purposes of a tax arrangement is to obtain treaty benefits that is not in accordance with the object and purpose of the relevant treaty provision.
The following are some other optional measures Canada adopted:
Canada’s proposed legislation to implement the MLI received Royal Assent on June 21, 2019 and the final step bring the MLI into force is to deposit the instrument of ratification with the OECD. The MLI will become effective on the first day of the third month after the month in which the deposit was made. For example, if the deposit date is July 15, 2019, the in force date is October 1, 2019. However, the MLI will only modify a CTA if both CTA partners ratify the MLI. The Department of Finance previously indicated its intent to make the deposit sometime in 2019. As at June 28, 2019, the deposit has not been made yet.
In addition, certain measures will only take effect at specific timelines listed below, based on the latest of the dates (the “countdown date”) on which the MLI comes into force for each party to a CTA:
It is important to understand the effect of MLI on businesses with an international presence. Organizations that rely on bilateral treaties should evaluate their tax exposures when determining withholding tax rates, dispute resolution procedures and other treaty benefits. PPT will now also be a risk factor for international structures, particularly with holding companies. If you have situations involving the use of tax treaties, a Cadesky Tax representative would be happy to assist you.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.