Canada: BEPS Final Reports: An Update On Treaty Shopping

The Organisation for Economic Co-operation and Development (OECD) sees treaty shopping as an important source of Base Erosion and Profit Shifting (BEPS). In this context, it identified the prevention of treaty abuse as one of fifteen issues or "actions" in respect of which recommendations were to be formulated as part of its Action Plan on BEPS, released in July 2013 (Action 6).[1] Following a two-year consultation process between the OECD and G20, the OECD presented final reports with respect to its BEPS project on October 5, 2015. This article provides an overview of the consensus that was reached between the OECD and G20 with respect to Action 6.


Building upon a preliminary discussion draft released in March 2014, the OECD published a package of initial proposals with respect to the prevention of treaty shopping and treaty abuse strategies in September 2014 (2014 Report).[2] The 2014 Report was promptly followed in November 2014 by a list of 20 issues that remained to be addressed, and which invited comments from members of the tax community. A response to these comments and ensuing proposals were provided in a discussion draft released in May 2015 (2015 Draft). Unsurprisingly, the Final Report on Action 6 (Final Report) has made certain superseding changes to the 2014 Report.[3] The Final Report is divided in three sections.

The Final Report

Section A

Section A of the Final Report (Section A) indicates that states should be given a degree of flexibility with respect to the prevention of treaty abuse. As was first agreed to in the 2014 Report, states are only expected to adhere to a "minimum standard" consisting of (1) making changes to the title and preamble of tax treaties as described below, and (2) adopting either (a) a principal purpose test (PPT) or (b) a limitation on benefits (LOB) provision, together with a rule aimed at "conduit arrangements".

However, Section A also indicates that a state which is not concerned by the effect of treaty shopping on its own taxation rights will not be obliged to apply provisions such as the LOB or the PPT, as long as it agrees to include provisions that its treaty partner will be able to use such provisions. This is the first instance in which the OECD and G20 agreed to reduce the "minimal standard" to which states are expected to adhere in countering treaty abuse. The 2015 Draft did not make a recommendation to that effect.

Principal Purpose Test

The PPT will apply a general anti-avoidance rule that would deny treaty benefits when it is reasonable to conclude that one of the main purposes of arrangements or transactions is to secure such benefits, and when obtaining such benefits in the circumstances would be contrary to the object and purpose of the relevant provisions of the tax treaty.

Following the 2014 Report, it was suggested that states should consider establishing a form of administrative process (i.e. a mechanism along the lines of the GAAR committee) that would ensure that the PPT rule is only applied after approval at a senior level. Language to that effect was consequently proposed in the 2015 Draft, and now constitutes a formal recommendation of Section A. Similarly, revisions introduced by the 2015 Draft and providing for some form of discretionary relief under the PPT rule have been reproduced in Section A.

Limitation on Benefits

The comprehensive model LOB provision provided in the 2014 Report, along with the revisions to its text and commentary formulated in the 2015 Draft, has been reproduced in Section A. However, building upon the 2015 Draft recommendations, Section A now proposes that tax treaties may only contain a "skeleton" or "simplified" version of the LOB rule. An example of such abridged rule is provided in Section A, as an option for countries that have adopted a PPT and will consequently not need to rely heavily on an LOB. In all material respects, the simplified LOB of Section A is textually identical to the version proposed in the 2015 Draft.

However, the United States contemporaneously released an updated version of the LOB provision included in their model treaty, which is not expected to be finalized prior to the end of 2015. For that reason, it was decided that the Final Report's LOB-related proposals and commentary will need to be further reviewed and finalized in 2016, in light of the comments received by the United States on their updated version.

Collective Investment Vehicles

The OECD defines Collective Investment Vehicles (CIV) as funds that are widely-held, hold a diversified portfolio of securities, and are subject to investor-protection regulation in the country in which they are established (i.e. mutual funds).[4] The 2014 Report indicated that further work was needed with respect to the policy considerations relevant to the treaty entitlement of CIVs and non-CIV funds. As a result of the follow-up work on these issues and of the comments received from stakeholders, it was agreed in the 2015 Draft that the LOB rule dealt with the application of the LOB to CIVs in a satisfactory way, and that there was therefore no need for additional changes. Accordingly, section A does not take the issue any further.

While many comments were also received as part of the 2015 Draft with respect to non-CIV funds (such as private equity funds[5], real estate investment trusts, and pension funds), Section A states that an examination of the issues related to the treaty entitlement of these types of funds will need to continue after September 2015, as a consensus was not reached on how they should be treated.

Conduit Financing Arrangements

Section A also modifies the anti-conduit provision recommended for adoption by the OECD, confirming the 2015 Draft proposals in this respect. Whereas the 2014 Report contained a proposed text for the rule, Section A now emulates the 2015 Draft and limits itself to providing a series of examples of situations that should or should not be caught by the rule, in order to guide states which may not accept the rule as proposed in the 2014 Report.

Section B

Section B of the Final Report (Section B) proposes revisions to the title and preamble of tax treaties which would clarify the intention of contracting states that tax treaties are not meant to be used to generate double non-taxation, including through treaty shopping strategies. The Section B revisions were not addressed by the 2015 Draft and are identical to those proposed in the 2014 Report.

Section C

Section C of the Final Report (Section C) modifies the introduction of the OECD Model Tax Convention[6], as did the 2014 Report, to include tax policy considerations which should help countries explain their decisions not to enter into certain tax treaties, and which would also be relevant for countries that need to consider whether they should modify or terminate a treaty previously concluded in the event that a change of circumstances raises BEPS concerns related to that treaty.

Section C also introduces new proposals seeking to restrict treaty benefits with respect to taxpayers that profit from certain preferential tax rules or with respect to certain drastic changes that could be made to a country's domestic law after the conclusion of a treaty. These proposals are identical to those first released for comments as part of the 2015 Draft. They did not appear in the 2014 Report. Around the same time, however, the United States released new versions of similar proposals which, much like the new version of the LOB rule, are not expected to be finalized prior to the end of 2015. For that reason, it was decided that the new Section C proposals will also need to be reviewed in 2016, in light of the comments received by the United States on their proposals.


Now that the Final Report is released, focus will likely shift to the implementation of the treaty-related measures into domestic legislation. As part of the 2014 Federal Budget, the Department of Finance of Canada had announced a decision to adopt a domestic rule, rather than a treaty-based approach, that would have denied treaty benefits to a person, who, it was reasonable to conclude was engaging in treaty shopping.[7] Such adoption was later put on hold, the government deciding that it would "await further work by the OECD" before implementing the proposal set out in the 2014 Federal Budget.

Nearly 90 countries are currently working together on the development of a multilateral instrument capable of incorporating the recommendations of Action 6 into the existing network of bilateral treaties (Action 15). The instrument will be open for signature by all interested countries in 2016. It remains to be seen whether Canada and the countries typically implicated in treaty shopping strategies will sign any such instrument.


[1] Action Plan on Base Erosion and Profit Shifting (Paris: OECD, 2013).

[2] Preventing the Granting of Treaty Benefits in Inappropriate Circumstances: Action 6: 2014 Deliverable (Paris: OECD, 2014).

[3] Preventing the Granting of Treaty Benefits in Inappropriate Circumstances: Action 6: 2015 Deliverable (Paris: OECD, 2015).

[4] The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles (Paris: OECD, 2010).

[5] Private equity funds generally do not meet the conditions set out in the definition of CIVs because they typically have a limited number of institutional investors, may not hold a diverse portfolio and are not subject to the same investor-protection regulation.

[6] Organisation for Economic Co-operation and Development, Articles of the OECD Model Tax Convention on Income and Capital (Paris: OECD, July 2010).

[7] See Stephanie Morand, "Treaty Shopping Proposals – A review of 2013 and 2014 Developments" (May 8, 2014), McCarthy Tétrault International Tax Newsletter (Taxnet Pro Corporate Tax Center) for a detailed review of the proposed measures.

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.