Introduction To The Forthcoming MLI And Principal Purpose Test (PPT)

Canada is a signatory to the Multilateral Convention to Implement Tax Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI"), and with a provision aimed at targeting treaty shopping, taxpayers may need to rethink their tax planning strategies when seeking a treaty-based tax benefit.

Until now, Canada's GAAR has had somewhat limited effectiveness against treaty shopping. In late 2018, the Tax Court published its reasons in Alta Energy Luxembourg SARL, part of a decade-long line of treaty shopping cases stating that such activity is not per se abusive under the GAAR. Compliments of a generous treaty-based tax exemption, Luxembourg-based Alta Energy Luxembourg S.A.R.L. ("Alta Energy") avoided paying any capital gains on the share sale of its subsidiary partly owing to the absence of a strong anti-treaty shopping provision in the relevant treaty, and because the Tax Court refused to apply the GAAR. Such decisions may become rarer once the MLI is