2019-0792651I7 concluded that Art. 10(8) of the Canada-UK Treaty would deny the Treaty dividend withholding tax rate reduction where a UK-resident corporation owned less than 10% of the voting shares of a Canadian corporation, but acquired additional shares the day before the dividend was paid so as to hold 10% of the shares. How would CRA apply the principal-purpose test (PPT) in Art. 7(1) of the Multilateral Instrument (MLI) in this situation?
After indicating that the PPT had supplanted Art. 10(8), CRA noted:
- Example E in para. 182 of the 2017 OECD Commentary on Art. 29 of the Model Convention describes the similar situation of a shareholder who is slightly below the threshold for access to the lower dividend rate, and who acquires shares for the purpose of taking advantage of the reduced rate. The view in the Commentary is that such transaction would be in accordance with the object and the purpose of Art. 10(2), which provides the reduced rate.
- This OECD answer was conditional on the taxpayer’s acquisition "genuinely increas[ing]" its participation in the company. CRA understood “genuinely increasing” to suggest that there be no manipulation of the shareholding in the form of transitory acquisitions where, for example, a person, holding 8% of the shares, bought just enough shares to exceed the threshold for accessing the 5% reduced rate and, right after the dividend, returning to its initial 8% shareholding.