Tax Insights: Canada moves to implement the multilateral instrument

June 05, 2018

Issue 2018-23

In brief

Canada has taken an important step towards ratifying the multilateral instrument (MLI).1 On May 28, 2018, the Canadian government introduced a Notice of Ways and Means Motion (NWMM)2 containing proposed legislation (the Implementation Act)3 to implement the MLI in Canadian law. Canada also announced that it will adopt several optional provisions in the MLI, in addition to the minimum standards that it had already agreed to adopt. 

In detail


The MLI is a multilateral treaty that amends the bilateral tax treaties between participating jurisdictions, to implement treaty-based measures developed by the Base Erosion and Profit Shifting (BEPS) Project. The BEPS Project is an initiative of the Organization for Economic Cooperation and Development (OECD) and the G-20 that has proposed measures to address international tax avoidance issues.

For more information on the MLI, see our:

Implementation process

The MLI was released on November 24, 2016, and signed by Canada on June 7, 2017. To date, 84 jurisdictions have either signed the MLI or expressed an intention to sign, including most major economies (with the United States being the most notable exception). 

For the MLI to take effect, Canada must enact legislation to implement the MLI in Canadian law. This process began on January 31, 2018, when the MLI was tabled in the House of Commons,4 followed by the tabling of the NWMM (with the proposed Implementation Act5) on May 28, 2018.

To complete this process, the proposed Implementation Act must be introduced as a legislative bill in Parliament where it must be debated and approved by the House of Commons and the Senate; the bill will then receive royal assent and be enacted in Canadian law. The Canadian government will then ratify the MLI.

Entry into force

The MLI will enter into force for Canada on the first day of the month that is at least three calendar months after ratification. The MLI will amend a particular tax treaty only after it enters into force for both treaty partners; the MLI changes will take effect:

  • for withholding taxes, at the start of the first calendar year beginning on or after the date the MLI enters into force for both treaty partners
  • for other taxes, for taxation years beginning at least six months after the MLI enters into force for both treaty partners

If Canada and a treaty partner both ratify the MLI before October 2018, the MLI will take effect for that tax treaty beginning in:

  • 2019, for withholding taxes
  • 2020, for other taxes (for calendar year taxpayers) 

However, only five jurisdictions have currently completed the ratification process, and Canada’s Parliament has a lengthy summer recess, which could delay Canada’s ratification.

Treaty changes

The MLI contains a list of treaty changes to address different BEPS issues, and participating jurisdictions can choose which changes to adopt, by making reservations when signing or ratifying the MLI. A reservation can be withdrawn at a later date, but there is no procedure for adding new reservations after the MLI is ratified. Generally, a change will be made to a particular treaty only if both treaty partners agree to the change. Although most changes are optional, all participants must agree to certain minimum standards. 

When Canada signed the MLI in 2017, it committed itself to only the minimum standards (which deal with treaty abuse and improving dispute resolution), and the mandatory binding arbitration for treaty disputes. Canada made the following commitments on treaty abuse:

  • Adding a preamble to its covered tax treaties, which essentially states that the treaty is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
  • Adding a principal purpose test (PPT), which will deny a treaty benefit if it is reasonable to conclude that one of the principal purposes of an arrangement or transaction was to obtain the benefit, unless granting the benefit would be consistent with the object and purpose of the relevant treaty provisions. Canada stated that it would adopt the PPT as an interim measure, and would attempt to negotiate detailed limitation on benefits (LOB) rules with its treaty partners, either in addition to or instead of the PPT.

In a backgrounder that accompanied the NWMM, Canada announced that it will also adopt the following optional measures when it ratifies the MLI:

  • 365-day test for dividends: Most Canadian tax treaties limit the rate of withholding tax on dividends paid by a resident of a treaty country, if the beneficial owner of the dividends is a company resident in the other treaty country and has a certain level of ownership interest in the dividend payer. The MLI change will restrict this treaty benefit to situations where the relevant ownership conditions are satisfied throughout the 365-day period preceding the dividend payment. An exception is provided for ownership changes resulting from reorganizations of the shareholder or dividend payer. 
  • 365-day test for capital gains: Most Canadian tax treaties provide an exemption for capital gains realized by a resident of a treaty country on a disposition of shares (or other ownership interests) of an entity residing in the other treaty country, unless the value of the ownership interests is derived principally from immovable property situated in the other treaty country. The MLI change will deny the treaty benefit if the relevant value threshold is met at any time in the 365-day period preceding the disposition.
  • Dual residency rule: This change will apply to persons (other than individuals) that would otherwise be resident in both treaty countries. The treaty partners will determine the residence of such an entity by mutual agreement. If there is no agreement, the entity will not be entitled to treaty benefits (except as mutually agreed by the treaty partners). This is similar to the existing dual residence rules in many Canadian tax treaties.
  • Relief from double taxation: Tax treaties generally contain rules to prevent double taxation. In some cases, these rules require a particular treaty country to provide a tax exemption for income earned by its residents that is also subject to tax in the other treaty country (in contrast, Canada generally provides relief through a foreign tax credit). Canada will adopt MLI provisions that allow its treaty partners to move from an exemption system to a foreign tax credit system.

Canada also noted that it could adopt additional measures after ratification.

PwC Comments

Canada’s adoption of these optional MLI changes will affect some cross-border investment (although the changes are not as far-reaching as the treaty abuse and dispute resolution provisions, which Canada had already agreed to adopt). The 365-day tests for dividends and capital gains will likely have the greatest impact, as they represent the greatest departure from the existing rules in many Canadian tax treaties. These changes will take effect for a particular treaty only if the other treaty partner agrees, so the choices made by Canada’s treaty partners are also important. 

The takeaway

Although the release of the NWMM is a significant step towards implementing the MLI, further steps must be taken to complete this process. The MLI changes could affect withholding taxes paid in 2019, if Canada and the relevant treaty partner ratify the MLI before October 2018. The ratification processes of Canada and its treaty partners should be monitored over the coming months.

1.  The formal name of the MLI is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
2.  The Notice of Ways and Means Motion to introduce an Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting.
3.  The Implementation Act will be called the Multilateral Instrument in Respect of Tax Conventions Act.
4.  Treaties must generally be tabled for at least 21 sitting days of Parliament before the implementing legislation can be introduced.
5.  The proposed Implementation Act is very brief, and is similar to the implementation acts for Canada’s bilateral tax treaties. 

Contact us

Ken Buttenham

Partner, PwC Canada

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Kara Ann Selby

Partner, PwC Canada

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Jamie Mitchell

Partner, PwC Canada

Tel: +1 416 814 5755

Ian Bradley

Partner, PwC Canada

Tel: +1 416 941 8260

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