CHAPTER 08 Tax Considerations
will be affected by the MLI if Canada and the relevant Covered Tax Agreement partner ratify the MLI under their respective domestic laws. The MLI came into force in Canada on December 1, 2019. As of July 7, 2023, provisions of the MLI are in effect with respect to most Covered Tax Agreements. In addition to the minimum standards of the MLI regarding treaty abuse and dispute resolution, and the mandatory binding arbitration provisions, Canada has announced its intention to adopt four optional MLI provisions: – a 365-day holding period ensuring that lower treaty- based rates of withholding tax on dividends will be made available only to companies holding shares for over 365 days, as opposed to those engaging in short- term share acquisitions (Article 8); – a 365-day lookback testing period for the purposes of determining whether capital gains on a sale of shares (or similar rights in an entity) that do not derive a certain percentage of their value from real or immovable property are exempted from tax (Article 9); – a provision on methods of resolving dual-resident entity cases (Article 4); and – a provision intended to allow treaty partners to move from a tax exemption system to a foreign tax credit system as their method of providing relief for double taxation (Article 5).
Canada has announced its intention to support the two-pillar solution agreed to by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, to address the tax challenges arising from the digitalization of the economy. In accordance with the OECD’s agreed minimum standard, Canada has adopted the principal purpose test (PPT) into each tax treaty listed as a Covered Tax Agreement. The PPT is a general anti-abuse rule that considers whether one of the principal purposes of an arrangement or transaction is to obtain treaty benefits in a way that is not in accordance with the object and purpose of the relevant treaty provisions. However, the federal government has announced its intention, where appropriate, to negotiate detailed “limitation of benefit” provisions into its treaties on a bilateral basis either in addition to or to replace the PPT. In addition, in the future, Canada may remove certain reservations in order to render previously inapplicable provisions of the MLI applicable. THE OECD TWO-PILLAR SOLUTION On October 8, 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) agreed to a two-pillar solution to address the tax challenges arising from the digitalization of the economy. Canada has announced its intention to support such a solution and it is expected that the federal government will release legislation to implement both Pillar One and Pillar Two in 2023.
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