Hot off the presses: Canada signs the Multilateral Instrument

13 June 2017


At the April 2017 International Tax Conference of the International Fiscal Association Canada, a representative of the Department of Finance (Finance) expressed that it was Canada's goal to be ready to participate in the official signing ceremony for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI"), on June 7, 2017, in Paris. The government of Canada achieved this goal and signed the MLI at the signing ceremony. As part of the signing process Canada has also released its preliminary MLI position in respect of the scope of adoption and reservations to the MLI; its definitive position for each jurisdiction must be provided upon the deposit of its instrument of ratification. Read our recent detailed note on the next steps to implementation of the MLI: Canada's adoption of the multilateral instrument - timing clarified, impact still uncertain.

Canada has taken a very conservative approach to the MLI, choosing only to adopt the minimum standards with respect to treaty abuse - the new tax treaty preamble and the substantive anti-treaty shopping technical rule - and the mandatory binding arbitration provision (similar to that found in the Canada-US Income Tax Convention (1980)).[1]

In a twist on what had generally been expected, in the context of the anti-treaty shopping rule, Canada will adopt the "principal purpose test" (PPT) but has specified that this rule should serve as an interim measure seeking, over the long term, to negotiate, on a bilateral basis with its treaty partners, detailed limitation on benefits provisions. The PPT generally provides that treaty benefits will be denied when one of the principal purposes of an arrangement is to obtain a treaty benefit in a way that is not in accordance with the purpose of the relevant treaty provisions. The PPT has been criticized for causing uncertainty as to what constitutes one of the "principal purposes" of a transaction or arrangement. There is also the difficulty of interpreting what is the purpose of a given treaty provision, although the new tax treaty preamble language provided in the MLI may assist to some extent.

On a preliminary basis, Canada has registered reservations on all other provisions in the MLI. This result was foreshadowed by a concern expressed by Finance at the April IFA meeting and repeated again in the Backgrounder to the MLI signing (issued by Finance on June 7, 2017) that "[a] country may expand the scope of its commitment under the Multilateral Convention by withdrawing or limiting a reservation, but it cannot subsequently narrow its commitment by adding or broadening a reservation at a later date". As stated in the Backgrounder, Finance is of the opinion that in certain circumstances, bilateral treaty updates may be preferable, and it has announced, also on June 7th, that it will begin treaty negotiations with Germany and Switzerland.

Canada has listed as Covered Tax Agreements (CTAs) almost all of the countries that were members of the ad hoc group that developed the MLI and that have a bilateral tax treaty with Canada. As expected, the United States is missing from the CTA listing. Also missing, due to the announced treaty negotiations, are Germany and Switzerland. On the other hand, Ireland, Luxembourg and the Netherlands have signed the MLI.

Below is a table showing all of Canada's CTAs, whether or not the other country has also listed its treaty with Canada as a CTA and each party's choice with respect to the treaty-abuse substantive minimum standard. Certain signatories have opted for the simplified limitation on benefits (S-LOB) test to apply in the place of the PPT. As Canada has not accepted a bilateral or unilateral application of the S-LOB in such cases, the PPT alone will nevertheless apply to all of Canada CTAs. Also included in the chart below are the articles of CTA that will be replaced by the PPT language in the MLI. We note a number of other countries have also expressed an intention to adopt detailed limitation on benefits rules through bilateral negotiations. It will be interesting to see whether this common intention will kick-start further treaty negotiations for Canada.

As the ratification process proceeds and Canada's MLI position in respect of the scope of adoption and reservations to the MLI is finalized, it will be interesting to see whether Finance changes its approach and opts in to other provisions of the MLI as was done by some of Canada's important treaty partners, including France.


Canada has named as CTA Other Signatory has named Canada as CTA Principal purpose test (PPT) including articles of CTAs replaced by art 7(1) MLI Limitation on Benefits (LOB)[2] - Canada has not accepted unilateral application, only PPT applies Indicated Intention to Negotiate Bilateral LOB
Burkina Faso          
Chile Art. 11(7), 12(7)
Colombia Art. 26(1)
Costa Rica          
Czech Republic    
Hong Kong Art. 10(7), 11(9), 12(7)    
Isle of Man          
Israel Art. 10(10), 11(10), 12(8), 13(7) have not been confirmed by Israel    
Latvia Art. 28(3) has not been confirmed by Latvia    
Lithuania Art. 28(3)    
Mexico Art. 10(7), 11(8), 12(10)  
New Zealand Art. 10(9), 11(10), 12(7)    

*Norway's MLI Position at the time of signature will be made available as soon as Norway has submitted the Convention to its Parliament in line with the required procedures in Norway
Poland Art. 10(6), 11(8), 12(8)  
San Marino          
Slovak Republic    
South Africa    
United Kingdom 10(8), 11(9), 12(8)    

[1] A detailed discussion of the mutual agreement procedures and a comparison of the positions of the signatories with respect to such procedures are beyond the scope of this article.

[2] Pursuant to Article 7(17)(c) of the Convention, the signatory chose to apply the Simplified Limitation on Benefits Provision pursuant to Article 7(6).

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