Principal Issues: What measures were put in place by the CRA to administer the anti-avoidance rule in Article 7 of the MLI?
Position: A consultation process including the creation of a committee similar to the GAAR Committee will be used to make recommendations on the application of that rule. The responsibility to provide recommendations on the application of the GAAR on tax benefits emanating from a bilateral treaty will be transferred to the new committee.
Reasons: See Response.
2019 CTF Annual Conference
CRA Roundtable
Question 1: Multilateral Instrument (MLI)
The MLI received royal assent in the form of Bill C-82 on June 21, 2019.
The MLI introduces into a significant number of Canada’s existing bilateral tax treaties an amended preamble indicating the amended treaty is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. It also introduces in such treaties a broad anti-avoidance rule in its Article 7 (colloquially referred to as the “principal purpose test” or the “PPT”), which reads as follows:
1. Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.
The date of ratification and entry into force for Canada and other countries is indicated in the list posted by the OECD at Signatories and Parties to the Multilateral Convention.
The date of entry into force for both countries that entered into a bilateral treaty that is amended by the MLI will determine the date of entry into effect of the PPT in respect of that treaty for different types of taxes and that date could be January 1, 2020 for withholding taxes.
Can the CRA provide an update on the measures that were put in place for the administration of the PPT?
CRA Response
At the CRA Roundtable of the 2017 CTF Annual Tax Conference, the CRA indicated that it was “exploring methods of promoting consistency in the application of the PPT within the Agency.” The CRA also indicated that “in this regard the GAAR Committee may offer a useful model.”
The Income Tax Rulings Directorate (ITRD) of the CRA was given the responsibility of coordinating the future consultation process with the headquarters of the different government stakeholders on the application or non-application of the PPT to a taxpayer.
That consultation process will involve a meeting of government stakeholders which will provide a recommendation on the application of the PPT. Such committee will be referred to as the Treaty Abuse Prevention Committee (the “TAP Committee”).
The meetings of the TAP Committee will be chaired by the Director of the International Division of ITRD and the stakeholders will consist of representatives from:
(a) the Legislative Policy and Regulatory Affairs Branch of the CRA, more specifically:
a. ITRD;
b. the International Relations and Treaties Office Division, Legislative Policy Directorate;
(b) the Tax Avoidance Division, International and Large Business Directorate (Compliance Programs Branch of the CRA);
(c) the International Tax Division, International and Large Business Directorate (Compliance Programs Branch of the CRA);
(d) the Department of Finance, Tax Legislation Division (Tax Policy Branch); and
(e) the Department of Justice (Tax Law Services and Legal Services).
At that same Round Table, the CRA also confirmed that it would “also entertain PPT rulings once the rules are in effect.”
The TAP Committee will make recommendations on the application or non-application of the PPT (whether in a bilateral tax treaty or incorporated by way of the MLI) to ITRD in the context of income tax ruling requests, or to the International and Large Business Directorate in the context of proposed assessments. The proceedings of the TAP Committee will mirror the proceedings of the GAAR Committee. Where a tax benefit as defined under subsection 245(1) of the Act emanates from a bilateral treaty, the responsibility to provide a recommendation on the application of that provision in respect of such benefit has been transferred from the GAAR Committee to the TAP Committee.
Yves Moreno
2019-082455
December 3, 2019