Canada

Ratification of MLI moves forward

TAX ALERT  | 

Updated on Sept. 3, 2019

On June 21, 2019, Finance Minister Bill Morneau announced the Royal Assent of Bill C-82, The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (also known as the Multilateral Instrument or MLI). The MLI is a global initiative developed by over 100 jurisdictions to counter tax avoidance strategies that lead to base erosion and profit shifting (BEPS).

The MLI will allow Canada to modify its existing tax treaties to include measures developed under the Organisation for Economic Co-operation and Development /G20 BEPS project without having to individually renegotiate those treaties, allowing the measures to be implemented in a synchronized and efficient manner.

For additional detail, please see RSM’s previous Tax Alert.

Entry into force and entry into effect

Assuming ratification will follow shortly after Royal Assent, the MLI enters into force on the first day of the month that is three calendar months following ratification, being as early as Oct. 1, 2019.

For withholding taxes, where the MLI is already in force for a counterparty to a Covered Tax Agreement (defined terms are explained in RSM’s previous Tax Alert), the MLI will enter into effect for that Covered Tax Agreement on the first day of the next calendar year that begins on or after the date on which the MLI enters into force for Canada, being January 1, 2020. Where the MLI is not yet in force for a counterparty, the MLI will enter into effect for that Covered Tax Agreement on the first day of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the contracting jurisdictions to the Covered Tax Agreement.

For other taxes, where the MLI is already in force for a counterparty to a Covered Tax Agreement, the MLI will enter into effect for that Covered Tax Agreement for tax years beginning six months after the MLI enters into force for Canada, meaning for tax years beginning on or after April 1, 2020, assuming ratification will follow shortly after Royal Assent. Where the MLI is not yet in force for a counterparty, the MLI will enter into effect for that Covered Tax Agreement for tax years beginning on or after six months from the latest of the dates on which the MLI enters into force for each of the contracting jurisdictions to the Covered Tax Agreement.

Update - Sept. 3, 2019

Canada deposited its ratification instrument with the OECD on Aug. 29, 2019. As a result, the MLI will enter into force in Canada on the first day of the month that is three calendar months following ratification, i.e., on Dec. 1, 2019.

For withholding taxes, where the MLI is already in force for a counterparty to a Covered Tax Agreement (defined terms are explained in RSM’s previous Tax Alert), the MLI will enter into effect for that Covered Tax Agreement on the first day of the next calendar year that begins on or after the date on which the MLI enters into force for Canada, being Jan. 1, 2020. Where the MLI is not yet in force for a counterparty, the MLI will enter into effect for that Covered Tax Agreement on the first day of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the contracting jurisdictions to the Covered Tax Agreement.

For other taxes, where the MLI is already in force for a counterparty to a Covered Tax Agreement, the MLI will enter into effect for that Covered Tax Agreement for tax years beginning six months after the MLI enters into force for Canada, meaning for tax years beginning on or after June 1, 2020. Where the MLI is not yet in force for a counterparty, the MLI will enter into effect for that Covered Tax Agreement for tax years beginning on or after six months from the latest of the dates on which the MLI enters into force for each of the contracting jurisdictions to the Covered Tax Agreement.

Takeaways for middle market businesses

Businesses with international footprints may be impacted if they rely on tax treaties to determine tax consequences such as withholding tax rates, dispute resolution procedures, allocation of taxing rights, and general eligibility for treaty benefits. Existing cross-border arrangements should be revisited prior to the end of the year to identify and analyze the implications of the MLI.

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