Tax Treaty Benefits Threatened as Canada Completes Ratification of OECD's Multilateral Instrument

Written by Jared Mackey, Greg Johnson and Taylor Page

On August 29, 2019, Canada completed its domestic ratification of the OECD-sponsored Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI). As noted in our prior blog (New Ratifications of the OECD's Multilateral Instrument Put Canadian Resource Holding Structures at Risk), the MLI will introduce a broad anti-avoidance rule under a "principal purpose test", that generally disallows a treaty benefit where obtaining the benefit is a principal purpose of a particular transaction or arrangement, unless granting the benefit would be in accordance with the object and purpose of the treaty.

For Canada's tax treaties with countries that have also signed and ratified the MLI, the principal purpose test will limit the availability of tax favourable exemptions for transactions and investment structures developed to take advantage of tax relief. In particular, the MLI will limit treaty benefits under the Canada-Luxembourg and Canada-Netherlands tax treaties, that are commonly relied on by multinational enterprises and private equity firms investing in the Canadian resource sector.

For those treaty partners and others that have already ratified the MLI, the MLI will be effective for withholding taxes on January 1, 2020, and for other taxes, including capital gains, for tax years beginning on or after June 1, 2020.

Contact any member of the Bennett Jones Tax group if you wish to discuss future implications of the MLI on your Canadian investments.