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Canada: Possible withholding tax changes with ratification of MLI

Canada: Possible withholding tax changes

Canadian taxpayers need to consider whether their withholding tax obligations will change now that Canada has ratified the multilateral instrument (MLI).

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The OECD developed the MLI as part of Action 15 of the base erosion and profit shifting (BEPS) initiative to modify existing bilateral treaties to implement BEPS measures. The MLI is intended to streamline the implementation of the tax treaty-related measures without the need to individually renegotiate each treaty.

 With ratification of the MLI, Canadian taxpayers may need to meet new conditions starting 1 January 2020 to benefit from the lower withholding tax rate under affected treaties when paying or receiving items such as interest, dividends, and royalties. In addition, Canadian residents also will need to consider how the MLI may affect the different income tax treaties—in some instances, certain optional MLI provisions could apply depending on whether both Canada and its treaty partner have adopted the particular provision.

 As a result of this upcoming change, Canadian taxpayers need to consider if they meet the new principal purpose test in the MLI to qualify for the lower withholding tax rate available under certain treaties.

In addition, Canadian corporations that receive foreign dividends may also be required to meet a new 365-day holding period for shares in order to have access to the reduced withholding tax rates under a treaty, or confirm that a non-resident shareholder meets the holding period test before it can apply a treaty-reduced withholding tax rate to dividends that it pays to that shareholder. Those corporations that determine that their withholding tax obligations will change also need to consider how their financial statements may be affected by this change.


Read a November 2019 report [PDF 206 KB] prepared by the KPMG member firm in Canada

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