Tax treaties

Background

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument or MLI) is a multilateral tax treaty that allows participating jurisdictions to adopt measures to prevent base erosion and profit shifting and to improve the dispute resolution process under their tax treaties. In general terms, base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises to exploit gaps and mismatches in the tax rules that apply between countries.

A unique aspect of the MLI is that it does not function in the same manner as an amending protocol. An amending protocol alters the text of a treaty. The MLI, on the other hand, is read alongside the treaties to which it applies modifying those treaties in their application.

Canada became a signatory to the MLI on June 7, 2017. The MLI was enacted by Parliament through the Multilateral Instrument in Respect of Tax Conventions Act, S.C. 2019, c.12. Canada subsequently deposited its instrument of ratification with the Depositary of the MLI (OECD Secretary General) on August 29, 2019 and the MLI entered into force for Canada, in accordance with Article 34 of the MLI, on December 1, 2019.

Which of Canada's tax treaties are modified by the MLI?

The MLI modifies Canada's tax treaties that are covered by the MLI. A tax treaty is covered by the MLI if both Canada and its treaty partner have listed the treaty for purposes of the MLI and have brought the MLI into force. Canada listed its tax treaties with 84 countries for the purposes of the MLI. Most of those countries are expected to become parties to the MLI and to list their tax treaty with Canada.

It should be noted that some of Canada's tax treaties will not be covered by the MLI. For example, the United States is not a signatory to the MLI and the Canada-United States Tax Convention was not included in Canada's listed treaties.

Canada's listed tax treaties for the purposes of the MLI

Impact of the MLI on Canada's covered tax treaties

The provisions of the MLI that apply to any particular covered tax treaty are a function of the terms of the MLI and on the compatibility of the choices that Canada and its treaty partner make under the MLI. Those choices are reflected in the notifications and reservations (MLI Positions) submitted to the Depositary of the MLI by Canada and its treaty partner.

The list of signatories and parties to the MLI, along with their MLI Positions, are available on the MLI Depositary (OECD) webpage :

MLI Signatories and Parties – MLI Positions

The MLI includes provisions that embody the treaty-related minimum standards established in the course of the OECD/G20 BEPS Project (namely those provisions on treaty abuse and the improvement of the dispute resolution process) and a number of optional provisions.  A country or jurisdiction signing the MLI commits to meet the minimum standards (the MLI mirrors the requirements of the minimum standard by providing flexibility in the manner in which those standards are met). The optional provisions of the MLI (those provisions that are not part of the minimum standard) may be adopted by the parties to a covered tax agreement or a reservation may be made not to apply them.

For information on the choices made by Canada to apply specific provisions of the MLI, see:

Backgrounder to June 21, 2018 News Release

Entry into Effect

The provisions of the MLI will generally enter into effect with respect to any particular covered tax treaty:

1. for taxes withheld at source - on the first day of the next calendar year that begins on or after the latest of the dates that the MLI enters into force for each of the parties to that treaty; and
2. with respect to all other taxes - for taxes that are levied with respect to taxable periods beginning on or after the expiration of six calendar months from the latest of the dates that the MLI enters into force for each of the parties to that treaty.

With respect to any particular covered tax treaty, Canada's treaty partner may choose to modify the entry into effect provisions as they apply to that treaty partner (see, in this respect, Articles 35(2) and (3) of the MLI) or to reserve the right to delay the entry into effect provisions for both parties to the treaty to allow for the completion of its internal procedures (see, in this respect, Article 35(7) of the MLI). In addition, separate entry into effect provisions normally apply to modifications to the provisions of the mutual agreement procedure and to the MLI's arbitration provisions.

The entry into effect of the provisions of the MLI with respect to each covered tax treaty are described in the synthesised text to that treaty.

MLI synthesised texts of Canada's covered tax treaties

The Department of Finance is preparing texts of Canada's covered tax treaties that illustrate the impact of the MLI on those tax treaties (each referred to as a "synthesised text"). The synthesised text of a covered tax treaty will be posted under the name of Canada's treaty partner under the "List of countries" with tax treaties in force, which list is accessible at the following link:

Department of Finance: Tax treaties

Prior to posting a synthesised text, Canada's practice is to provide its treaty partner with the opportunity to review and comment on the synthesised text.

The synthesised texts are being provided for convenience of reference and are not a source of law. The applicable sources of law are the legal texts of the covered tax treaties and the MLI.

It should be noted that some of Canada's covered tax treaties may be modified by the MLI before the synthesised text for those treaties are posted.  Therefore, in the absence of a synthesised text for a particular tax treaty, taxpayers and their advisors should take steps to determine if the MLI has entered into effect with respect to the relevant provisions of that treaty and to verify the manner in which the MLI applies. It should also be noted that the synthesised text of a covered tax treaty is generally based on the MLI Positions of Canada and its treaty partner at the time that Canada and its treaty partner deposit their respective instruments of ratification, acceptance or approval. These MLI Positions may subsequently be modified as provided under the MLI (e.g. by the withdrawal of a reservation) which may have an impact on the application of the MLI to the covered tax treaty.

Access to the MLI

The legal text of the MLI is available on the MLI (OECD) webpage :

in English: http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf

in French: http://www.oecd.org/fr/fiscalite/conventions/convention-multilaterale-pour-la-mise-en-oeuvre-des-mesures-relatives-aux-conventions-fiscales-pour-prevenir-le-BEPS.pdf

The Convention on Mutual Administrative Assistance in Tax Matters (MAAC) provides for administrative co-operation between jurisdictions in the assessment and collection of taxes for the purpose of combating tax avoidance and evasion. There are currently more than 140 jurisdictions that are participating in the MAAC. In Canada, the MAAC applies to Canadian taxes imposed by the Income Tax Act, as well as certain taxes imposed under the Excise Tax Act and the Excise Act, 2001. Canada became a party to the MAAC on March 1, 2014.

The Canada Revenue Agency relies on the MAAC to support a broad platform of information exchanges with other countries including the automatic exchange of information under Country-by-Country Reporting for large multinational enterprises and the exchange of financial account information under the Common Reporting Standard. The text of the MAAC, along with the declarations and reservations deposited by Canada in respect of the MAAC, are available at the following link:

Convention on Mutual Administrative Assistance in Tax Matters