Two individuals (Mr. and Mrs. A), who had been resident in Hong Kong from before 2013, each transferred 50% of the shares of a Canadian-resident corporation (Canco) to a new Hong Kong company (HKCo). Art. 10(2) of the Canada-Hong Kong Treaty reduced the dividend withholding tax rate on a dividend paid by a Canadian company to a HK resident (under Art. 10(2)(a)) to 5% if the beneficial owner is a company controlling directly or indirectly 10% of the voting power of the dividend payer, or to 15% for other HK residents. However, Art. 10(7) denied Treaty benefits to a resident if “one of the main purposes of any person concerned with … [a] transfer of the shares … or with the establishment … of the person that is the beneficial owner of the dividend, is for the resident to obtain the benefits of this Article.”
CRA noted that for dividends paid after 2023, it was no longer necessary to satisfy the test in Art. 10(7) of the Treaty in order for the rate reduction to occur, and that instead the relevant test was the principal purpose test (PPT) in Art. 7(1) of the MLI.
CRA emphasized that even if the purpose test in Art. 7(1) was satisfied, Art. 7(1) nonetheless states that it does not apply to deny a Treaty benefit if “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.” CRA then briefly stated:
Article 7(1) of the MLI will generally not apply to deny the benefits of Article 10(2)(a) of the Agreement on such dividends paid on or after January 1, 2024.
There was no similar object-and-purpose exception in Art. 10(7) of the Treaty so that, for dividends paid before 2024, it was necessary that one of the main purposes of transferring to the HK corporation was not accessing a rate reduction under Art. 10. If there was such a main purpose, the effect would be to increase the dividend withholding rate from 15% to 25%.