The Multilateral Instrument – The New Preface to the Tax Treaty Brochure

Volume No. 19-04

Author: Henry Shew, CPA, CA, TEP, CPA (Washington), MAcc
Editor: Matthew Cho, CPA, CA, TEP

The use of creative international structures by multinational corporations to transfer a significant portion of their global profits to low tax jurisdictions led the Organisation of Economic Co-operation and Development (“OECD”) to undertake the Base Erosion and Profit Shifting (“BEPS”) study. The study concluded with 15 proposed initiatives, one of which is to address potentially abusive use of tax treaties between countries to shift profits. Renegotiating individual treaties is not feasible and hence the multilateral instrument, formally called the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) was developed.  

On June 7, 2017, Canada signed the MLI along with 67 other jurisdictions. As at today, there are a total of 89 signatories to the MLI. However, the U.S. did not sign the MLI as they believe their tax treaties have sufficient measures to mitigate exposure to BEPS.

The MLI is a multilateral treaty that modifies the effect and interpretations of all covered tax agreements (“CTAs”) between participating countries. Canada has designated 75 of its 93 bilateral tax treaties as CTAs. The MLI contains minimum standards that all participating countries must agree to adopt which deal with treaty abuse and improving dispute resolutions.  Additional optional provisions or reservations can be adopted by participating countries.

One of the minimum standards adopted by Canada is the principal purpose test (“PPT”) in relation to treaty abuse.  Under the PPT, treaty benefits will be denied if one of the principal purposes of a tax arrangement is to obtain treaty benefits that is not in accordance with the object and purpose of the relevant treaty provision.

The following are some other optional measures Canada adopted:

  • Canada and its CTA partners will determine the residence of a dual resident entity by mutual agreement. If the competent authorities are unable to determine the residence of the entity, such an entity will not be entitled to the treaty benefits.  This impacts mostly corporations or trusts as tax treaties generally have tie-breaker rules for individuals.
  • A foreign shareholder of a Canadian corporation must hold the shares for at least 365 days preceding any dividend payment before the foreign shareholder can access low treaty-based withholding tax rates. An exception to this restriction is if qualifying shareholdings change due to a corporate reorganization.
  • Capital gains are usually exempt from taxation in the source country under most bilateral treaties unless the ownership interest is derived principally (i.e., 50%) from immovable property in the source country (or shares that derive more than 50% of their value from such property). The MLI will deny this exemption under a CTA if the relevant value threshold (i.e., 50%) is exceeded at any time 365-days prior to the disposition.

Canada’s proposed legislation to implement the MLI received Royal Assent on June 21, 2019 and the final step bring the MLI into force is to deposit the instrument of ratification with the OECD.  The MLI will become effective on the first day of the third month after the month in which the deposit was made.  For example, if the deposit date is July 15, 2019, the in force date is October 1, 2019.  However, the MLI will only modify a CTA if both CTA partners ratify the MLI.   The Department of Finance previously indicated its intent to make the deposit sometime in 2019.  As at June 28, 2019, the deposit has not been made yet.

In addition, certain measures will only take effect at specific timelines listed below, based on the latest of the dates (the “countdown date”) on which the MLI comes into force for each party to a CTA:

  • Withholding taxes – MLI will take effect beginning on the day of the next calendar year after the countdown date. For example, if the MLI for both Canada and another CTA partner both came into force in 2019, the effective date would be January 1, 2020.
  • Other taxes – MLI will take effect for taxation years beginning on or after six months after the countdown date.  For example, if the other party to a CTA already ratified the MLI and Canada’s MLI comes into force on October 1, 2019, this provision will take effect for taxation years that begin on or after April 1, 2020.

It is important to understand the effect of MLI on businesses with an international presence. Organizations that rely on bilateral treaties should evaluate their tax exposures when determining withholding tax rates, dispute resolution procedures and other treaty benefits. PPT will now also be a risk factor for international structures, particularly with holding companies. If you have situations involving the use of tax treaties, a Cadesky Tax representative would be happy to assist you.


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The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.