Canada: MLI Big Picture Changes Update

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI") is a multilateral treaty created by the Organization for Economic Co-operation and Development ("OECD") that modifies bilateral tax treaties between participating jurisdictions to implement international tax rules and lessen the opportunity for tax avoidance by multinational enterprises.

The MLI was released on November 24, 2016 and 84 jurisdictions have already joined the MLI, which now covers over 1,400 bilateral tax treaties.1 Notably, the United States did not sign the MLI.

On June 7, 2017, Canada signed the MLI. On May 28, 2018, Canada introduced a Notice of Ways and Means Motion2 to introduce an Act to Implement the MLI in Canadian law. Within a month, on June 20, 2018, Bill C-823, called Multilateral Instrument in Respect of Tax Conventions Act, was introduced. Bill C-82 has had Second Reading and has been referred to the Standing Committee on Finance.4 The next steps in the process for Canada to ratify the MLI is for the Parliament to debate and approve Bill C-82. Assuming the bill receives Royal Assent, Canada will then deposit a notice of ratification with the MLI depository.5

Canada has listed 75 of its 93 tax treaties as Covered Tax Agreements6 which will be affected by the MLI if Canada and the relevant Covered Tax Agreement partner ratify the MLI under their respective domestic laws. Some of the tax treaties that are not in the list, apart from the US, include Canada's tax treaties with Switzerland and Germany, presumably because Canada is currently holding bilateral treaty negotiations with these tax treaties.

For applicable tax treaties, the MLI will enter into force on the first day of the month beginning three months after Canada and the relevant treaty partner complete their notifications to the OECD and it will enter into effect for (a) withholding taxes, on the first day of the next calendar year, and (b) for other taxes, for tax years beginning six months after the MLI enters into force. 7

As an example, if both Canada and the United Kingdom notified the OECD in December of 2018 that their domestic ratification procedures were complete, the MLI would enter into force for the Canada-UK tax treaty on April 1, 2019. The MLI would then enter into effect for the Canada-UK treaty (a) for withholding taxes, on January 1, 2020, and (b) for other taxes, for tax years beginning on or after October 1, 2019.

Every participating jurisdiction was required to sign on to the minimum standard provisions in respect of the prevention of treaty abuse and to improve dispute resolution mechanisms8.

To address the situations of treaty abuse, the participating countries had an option to adopt a principal purpose test ("PPT") or a PPT supplemented with a simplified limitation on benefits rules ("LOB"). The PPT disallows a treaty benefit where obtaining the benefit was one of the principal purposes of doing a particular transaction or an arrangement, unless granting of the benefit would be in accordance with the object and purpose of the provisions of the treaty. Canada opted for the PPT as a substantive technical rule. In the long term, however, Canada, where appropriate, will seek to negotiate, on bilateral basis, a detailed LOB.9

Aside from these minimum standard provisions, the participating jurisdictions were able to opt in or opt out of various other provisions. When Canada signed MLI, it reserved on other provisions because a reservation can be withdrawn but there is no procedure for adding new reservations once the MLI is signed.

Canada has now expressed its intention to remove its reservations on some of the optional provisions dealing with dividends (Article 8), capital gains (Article 9), dual residency tie-breaker rules (Article 4) and relief from double taxation (Article 5). In particular, Canada proposes to:

  • adopt a 365-day holding period for shares of Canadian subsidiaries held by foreign corporate shareholders for such shareholder to be entitled to the reduced withholding tax rate on dividends from its Canadian subsidiary. The changes in ownership resulting from a corporate reorganization are not taken into account for the purposes of computing that period;
  • adopt a 365-day test period for non-residents who realize capital gains on the disposition of shares or other interests that derived their value principally from Canadian immovable property. Essentially, the MLI will deny the treaty benefit if this test is met at any time during such period preceding the disposition;
  • introduce an approach to resolve dual resident entity cases (other than of individuals); and
  • introduce a provision that will allow certain treaty jurisdictions to relief double taxation by moving from an exemption system to a foreign tax credit system.10


1 The Organization for Economic Cooperation and Development ("OECD"), Saudi Arabia signs landmark agreement to strengthen its tax treaties (September 18, 2018), online: OECD

2 Canada, Department of Finance, Notice of Ways and Means Motion to Introduce an Act to Implement a Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion And Profit Shifting (May 2018), online: Department of Finance:

3 Parliament of Canada, Bill C-82, online: Parliament of Canada:

4 Parliament of Canada, House Government Bill, online: Parliament of Canada:

5 Canada Revenue Agency ("CRA") Roundtables, Conference, 2017-0724151C6 -- CTF Conference Roundtable 2017—Q8: Principal Purpose Test.

6 Department of Foreign Affairs, Trade and Development, Status of List of Reservations and Notifications at the Time of Signature (May 30, 2017), online: OECD

7 OECD, Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting at paras 322-327, online: OECD

8 Canada, Department of Finance, Backgrounder: The Next Step in the Fight Against Aggressive International Tax Avoidance (May 28, 2018): online: Department of Finance .

9 Canada, Department of Finance, Backgrounder: Impact of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (June 7, 2017), online: Department of Finance: .

10 Supra note 8.

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