Bloomberg Tax
Nov. 21, 2019, 3:22 PM

Impact of Canada’s Ratification of the MLI

Richard  Bennett
Richard Bennett
Bloomberg Tax International Forum
Christopher Ross
Christopher Ross
Bloomberg Tax International Forum

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Canada ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) by depositing its ratification instrument with the Organization for Economic Co-operation and Development (OECD) on August 29, 2019. The federal legislation ratifying the MLI in Canada is contained in Bill C-82, which received royal assent on June 21, 2019.

Ratification will affect certain provisions in many of Canada’s tax treaties beginning on January 1, 2020.


The MLI is a multilateral convention that was negotiated in November 2016 by over 100 countries. It is intended to provide an efficient means for signatories to adopt selected tax treaty measures developed as part of the OECD/G-20 Base Erosion and Profit Shifting initiative without having to renegotiate individual treaties bilaterally. Canada signed the MLI on June 7, 2017 and is currently one of nearly 100 parties to it.

Subject to ratification, the MLI only modifies Covered Tax Agreements (CTAs). A tax treaty becomes a CTA when both parties to it list it as such with the OECD. Canada has currently listed 84 of its 93 tax treaties, of which 27 are CTAs as of October 18, 2019, including Canada’s tax treaties with Australia, India, Ireland, Luxembourg, the Netherlands, the United Arab Emirates, and the U.K. Notably Canada has not listed its tax treaties with the U.S. (which has not signed the MLI) or with Germany or Switzerland (which Canada has announced it intends to renegotiate bilaterally—see 2018 IFA (Canada) Conference, Finance Roundtable, Question 2).

Some MLI provisions are mandatory while others are optional. The mandatory provisions, which provide minimum standards for preventing treaty abuse and improving dispute resolution, apply to all CTAs. An optional provision applies to a CTA only if both parties to the CTA adopt it—i.e. if neither party opts out of the provision by registering a reservation on it. A party may withdraw or narrow its reservations after signing the MLI, but not add new ones after that time (MLI, Article 28(9)).

The MLI does not directly amend the text of a CTA like an amending protocol, but rather must be read alongside the CTA. Although not a legal requirement, at the 2019 IFA (Canada) Conference, Canada indicated that it intends to produce unofficial synthesized texts of its CTAs.

Sorting out which treaties are CTAs, and what optional provisions are covered by each CTA, can be confusing. To aid in this, the OECD maintains an “MLI Matching Database,” which matches information from parties’ MLI positions.

Canada has taken a restrained approach to optional provisions. It reserved on all optional provisions except binding arbitration when it signed the MLI, and removed only four reservations (discussed below) on ratification.

Mandatory Minimum Standards

Preventing Treaty Abuse

Canada adopted the following minimum standards for preventing treaty abuse in its CTAs when it signed the MLI:

modified preamble—a modified preamble that states the treaty is intended to eliminate double taxation “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance” (MLI, Article 6(1)); and

principal purpose test (PPT)—a broad anti-avoidance rule that denies a treaty benefit if it is reasonable to conclude one of the principal purposes of any arrangement or transaction that resulted in the benefit was to obtain the benefit, unless granting the benefit is in accordance with the object and purpose of the relevant provisions of the treaty (MLI, Article 7(1)). Pursuant to MLI, Article 7(17)(a), Canada expressed that while it accepts the application of the PPT alone as an interim measure it intends where possible to adopt a limitation on benefits provision in addition to or in replacement of the PPT through bilateral negotiation.

Where it applies, the PPT denies the treaty benefit entirely. Although the MLI contains a so-called “remedial benefits” provision that authorizes the competent authority to grant a full or partial treaty benefit that would otherwise be denied by the PPT (MLI, Article 7(4)), Canada has not adopted this provision.

The PPT is a significant development in Canada’s tax treaty landscape. The breadth of its wording and limited interpretive guidance to date have created significant uncertainty for taxpayers and their advisers as to when treaty benefits that would have previously been allowed may now be denied by the PPT. The Canada Revenue Agency has offered very little guidance on how it intends to administer the PPT, and stated at the 2018 IFA (Canada) Conference that the best way to obtain guidance on whether it will apply in a given case is to seek an advance income tax ruling (2018-0749181C6 (May 16, 2018)).

Improving Dispute Resolution

Canada also adopted the minimum standard for mutual agreement procedure (MAP) when it signed the MLI, which requires parties to implement a MAP under which a taxpayer may challenge the application of a CTA by one or both parties to the relevant competent authorities, who must use their best efforts to resolve the issue (MLI, Article 16(1)).

Optional Provisions

Currently Canada has removed its reservations on the following optional provisions:

  • binding arbitration—related to the MAP minimum standard, this provision requires parties, at the taxpayer’s request, to submit MAP cases that have not been resolved by the competent authorities within a specified period (generally two years from the case’s start date) to an independent and impartial arbitration panel whose decision will be binding on the parties (MLI, Part VI; Article 19(1) is the core arbitration provision);
  • 365-day holding period test for dividends—this provision imposes a 365-day holding period for shares for determining whether dividends on those shares will qualify for an ownership-based reduced withholding tax rate under the treaty (MLI, Article 8(1)). Under this provision, the applicable ownership requirement must be met throughout a 365-day period that includes the day of the payment of the dividend;
  • 365-day look-back test for capital gains—this provision imposes a 365-day look-back period for determining whether shares in a company (or interests in other entities, such as partnerships or trusts) derive their value principally from immovable property for capital gains purposes (MLI, Article 9(1)). Under this provision, the applicable value threshold will be met if it was met at any time during the 365 days preceding the disposition;
  • dual residency rule—this provision specifies certain factors to be taken into account by the competent authorities when resolving dual-residence cases (i.e. place of effective management, place of incorporation or other constitution, and any other relevant factors) (MLI, Article 4(1)); and
  • relief from double taxation—this provision allows Canada’s treaty partners to move from an exemption system to a foreign tax credit system as their method for eliminating double taxation (MLI, Article 5(1)).


The MLI will enter into force for Canada on December 1, 2019, effective in general as follows:

  • taxes withheld at source, the first day of the first calendar year that begins after the MLI enters into force for both parties (this will be January 1, 2020 for many of Canada’s CTAs); and
  • all other taxes, the first day of the first taxable period that begins six months after the MLI enters into force for both parties (this will be June 1, 2020 for many of Canada’s tax treaties).

Planning Points

The MLI will affect certain provisions in many of Canada’s tax treaties beginning on January 1, 2020.

Perhaps the most significant change is the PPT, given the breadth of its wording and the severity of its consequences.

Some of the technical changes, particularly the 365-day holding period test for dividends and the 365-day look-back test for capital gains, will also significantly affect many of Canada’s tax treaties.

Clearly, when considering the application of a Canadian tax treaty to a particular transaction, it is no longer sufficient to review the treaty alone. Canada’s MLI position, the OECD Matching Database, and the other treaty partner’s MLI position must all now be consulted and taken into account.

Richard Bennett is Senior Tax Counsel and Christopher Ross is an Associate at DLA Piper, Canada.

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