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BEPS, treaty shopping and Canadian developments – Canadian proposal deferred

Canada has been taking a separate approach to treaty shopping than that of the OECD, although both are motivated by similar concerns. Taxand Canada discusses how the government has put a temporary halt to the development of their treaty shopping proposals.

As noted previously, the Canadian Minister of Finance (the late Jim Flaherty) announced in his Budget of March 2013 the Government of Canada’s “intention to consult on possible measures that would protect the integrity of Canada’s tax treaties while preserving a business tax environment that is conducive to foreign investment”. This was followed by a formal proposal for a domestic Canadian treaty shopping rule in the federal budget of February 2014 (Budget 2014).

One of the criticisms of the Canadian proposal has been that it did not pay sufficient respect to the OECD base erosion and profit shifting (BEPS) process and the further announcements on the BEPS treaty shopping actions. It was expected that this 'made-in-Canada' treaty shopping rule would be introduced into Parliament this autumn when the second Budget Implementation Act (BIA) is tabled, which typically occurs shortly after Parliament resumes sitting after the summer recess.

Against this background, the Department of Finance surprised many observers when it announced in late August that 'after engaging in consultations on a proposed anti-treaty shopping measure, the government will instead await further work by the OECD and the G20 in relation to their BEPS initiative' before advancing its own proposal.

What does this mean?
It is still not certain whether Canada will pursue the 'made-in-Canada' domestic treaty shopping rule. The release by the OECD on 16 September 2014 of its report 'Preventing the Granting of Treaty Benefits in Inappropriate Circumstances' does not seem to provide much assistance in trying to divine what Canada’s next step will be. 

In earlier statements on treaty shopping, as part of the BEPS process, the OECD had said that one of the objectives in this regard was to 'develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances'. Accordingly, the OECD did seem to leave open the potential for domestic treaty shopping rules. However, in the September report, extensive discussions in respect of such domestic rules were noticeably absent. Conversely, some argue that this report leaves open the potential for countries to adopt their own treaty shopping responses, as long as they are in accord with the general OECD BEPS approach.

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Tim Wach
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Taxand's Take

It’s not clear what the next step will be from the Canadian Department of Finance, however, multinationals should watch carefully for clues in this regard. Some of the clues already revealed suggest that the department, in the consultation process, has become more sensitive to impacts that a domestic treaty shopping rule would have and that had not been previously anticipated. One particular area of concern that the department  seems to have identified, and one which the OECD also identified in its September report, is the area of collective investment vehicles (CIVs) and non-CIV Funds.

It may be that the department delayed its treaty shopping proposal not only to await the work of the OECD, but because they wanted to consider further their own proposal. If that was the case, then they should be commended. Nevertheless, the jury seems to still be out on whether Canada will go forward with its own domestic treaty shopping rule. Stay tuned!

Taxand's Take Author

Tim Wach
Global Managing Director

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