Canada: Introduction To The Forthcoming MLI And Principal Purpose Test (PPT)

Last Updated: April 5 2019
Article by Shane Lamond

Canada is a signatory to the Multilateral Convention to Implement Tax Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI"), and with a provision aimed at targeting treaty shopping, taxpayers may need to rethink their tax planning strategies when seeking a treaty-based tax benefit.

Until now, Canada's GAAR has had somewhat limited effectiveness against treaty shopping. In late 2018, the Tax Court published its reasons in Alta Energy Luxembourg SARL, part of a decade-long line of treaty shopping cases stating that such activity is not per se abusive under the GAAR. Compliments of a generous treaty-based tax exemption, Luxembourg-based Alta Energy Luxembourg S.A.R.L. ("Alta Energy") avoided paying any capital gains on the share sale of its subsidiary partly owing to the absence of a strong anti-treaty shopping provision in the relevant treaty, and because the Tax Court refused to apply the GAAR. Such decisions may become rarer once the MLI is ratified. 

Under Article 7 – Prevention of Treaty Abuse of the MLI, treaty shopping, and the attendant tax benefits, may be invalidated when an arrangement or transaction has as one of its principal purposes the obtaining of the tax benefit. This is assessed under the principal purpose test ("PPT").

The MLI applies to 75 bilateral agreements Canada has entered with other jurisdictions (as of the time of signature, May 30, 2017) and represents an explicit and concerted multilateral effort to curb treaty shopping as an activity to avoid taxation. This will give the CRA a more express tool (albeit broadly worded) for dealing with the activity. Were Alta Energy Luxembourg SARL to be heard under the MLI, and according to the PPT, the decision may have resulted in the tax benefit being denied to Alta Energy. Until ratification, however, taxpayers may still be able to seek tax benefits under treaties without falling afoul of the GAAR.

The limited success of applying the GAAR to treaty shopping

The Tax Court of Canada had previously outlined the limited reach of GAAR in invalidating transactions involving treaty shopping in Canada v. MIL (Investments) S.A. The GAAR requires that three elements be satisfied for a finding of tax abuse: (1) the identification of a tax benefit; (2) the identification of an avoidance transaction; and (3) a finding of misuse or abuse of legislative provisions. An avoidance transaction lacks a bona fide purpose other than to obtain the tax benefit.Under this test, treaty shopping is not per se abusive where the activity merely offends vague tax policy principles announced in the relevant treaty.  Instead, a purposive and contextual reading of the treaty provision, in consideration of the Income Tax Act, is the preferred approach. If the purpose of the provision is not offended, the GAAR does not apply.

This position was upheld in Garron Family Trust v. The Queen, and Antle v. The Queen, two later cases dealing with the Canada and Barbados tax treaty addressing double taxation and fiscal avoidance. All three cases affirm the proposition that treaty shopping is not abusive for the reason alone that no tax is applied to the transaction on account of tax treaty benefits. The Tax Court of Canada expects Canada's negotiators to know when a partner jurisdiction is and is not taxing its residents and to negotiate its tax treaties accordingly. Absent legislation, the court won't second guess the government's actions.

MLI and the principal purpose test (PPT): a new potential tool for tax authorities

The PPT under the MLI will, however, offer a new tool to the CRA in capturing these precise circumstances. Contained in Article 7 of the MLI, the PPT will operate to deny a tax benefit where it is reasonable to conclude, regarding all the circumstances, that one of the principal purposes of the transaction was to obtain the benefit. The benefit may be denied unless it is established that granting it accords with the object and purpose of the relevant provision. In the Luxembourg Treaty, for example, the rationale underlying the provision was the exempting of residents of Luxembourg from taxation on capital gains with respect to the type of property involved.

In Alta Energy Luxembourg SARL, Alta Energy objected to the alleged abusiveness of the transaction, but it conceded there was a tax benefit and an avoidance transaction. Under the PPT, such concessions may need to be rethought. Given that the stated purpose of Article 7 is to prevent treaty shopping, Alta Energy would need to show that obtaining the treaty benefit was not a primary purpose of any of the transaction. It remains to be seen who will bear the burden of proving what the purpose of the relevant treaty provision is. Arguably, this could fall to the CRA. As the government's representative, it will be better positioned to assert what Canada's intention was with respect to the provision.

Other questions arise regarding how the GAAR and the PPT will interact. Both resort to a reasonableness test and look at all the relevant facts. Were a taxpayer to be assessed under the PPT, a finding that obtaining the tax benefit was not a primary purpose may preclude assessment under GAAR. This is because the absence of a primary purpose in obtaining a tax benefit would strongly suggest a bona fide purpose to the transaction.

A further policy-based support for this idea is that defending against two separate general avoidance tests burdens taxpayers with two defences. Given the comprehensiveness of the PPT, its focus on treaty shopping and the availability of OECD commentary on the provision, the CRA might consider reserving the GAAR for other instances of alleged tax avoidance.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions