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Canada: Conservative approach taken to BEPS Multilateral Instrument


Ian Caines

Bill Maclagan

On June 7 2017, Canada was among 68 countries to sign the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI). The MLI is an instrument developed as part of the OECD's project on base erosion and profit shifting (BEPS), in order to allow participating countries to efficiently implement BEPS recommendations in their tax treaties, without needing to individually renegotiate each treaty.

Canada has provisionally indicated that it is willing to have the MLI cover 75 of its existing tax treaties. However, Canada has also indicated that it expects bilateral negotiations to continue to be preferable (or necessary) in some cases. Underlining this point, on the same day that Canada signed the MLI it also announced planned negotiations to update the German and Swiss tax treaties, neither of which were included in Canada's provisional list of covered treaties for the MLI.

The MLI's provisions cover a range of BEPS subjects, including treaty abuse, hybrid mismatch arrangements, and permanent establishments. Countries signing the MLI must determine which of their tax treaties the MLI will apply to, and may register reservations against particular MLI provisions. Generally speaking, an MLI provision will only modify the terms of a treaty between two countries where the countries both elect to have the MLI apply to the treaty, and neither has reserved on the particular MLI provision. Only in the case of certain provisions reflecting minimum standards for treaty abuse and dispute resolution (including mutual agreement procedures) are signatories prevented from opting out of a provision entirely through reservation. There remains some flexibility regarding how certain minimum standards are satisfied.

Canada has adopted a conservative approach to accepting MLI provisions so far, by registering reservations against all of the optional MLI provisions apart from certain provisions relating to treaty abuse and dispute resolution. This approach allows Canada maximum flexibility going forward, since the terms of the MLI will allow reservations to be withdrawn in the future, but generally will not permit new reservations to be added following ratification.

With regard to treaty abuse, Canada adopted the MLI's principal purpose test (PPT). The PPT is expected to be easier for taxpayers to satisfy than the domestic anti-treaty shopping rules, which had previously been proposed for Canadian domestic legislation (but which the government is no longer pursuing, in light of the MLI), but the exact scope of the PPT, as interpreted by Canadian courts, remains to be seen. Looking past the MLI, Canada has indicated that it will, "where appropriate", seek to implement detailed limitation on benefit provisions through bilateral negotiations.

Dispute resolution is one area where Canada has gone beyond the required minimum standards by also electing to adopt most of the MLI's rules for mandatory binding arbitration. Canada likely feels comfortable with these rules as they are similar to rules that Canada has already accepted under its treaties with the US, UK and Switzerland.

Canada is continuing to pursue its domestic process for ratification, which a government official has suggested could be completed in time for the MLI to enter into force for Canada before the end of 2018. Once the MLI has entered into force for both parties to a particular treaty, the MLI will generally apply to taxes under the treaty for taxable periods beginning at least six months after the MLI has entered into force in both jurisdictions (i.e. mid-2019, for assuming a late 2018 entry into force), except that the MLI will apply in respect of withholding taxes under the treaty starting January 1 of the calendar year following the mutual entry into force.

Bill Maclagan, QC (, Vancouver and Ian Caines (, Toronto

Blake, Cassels & Graydon

Tel: +1 604 631 3336 and +1 416 863 5277


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