Background
Canada has a series of bilateral tax treaties. These have
evolved over time to include various anti-avoidance, and
anti-treaty shopping rules. These rules include limitation on
benefits provisions and purpose tests. The treaty between Canada
and Hong Kong had one of the broadest rules.
Many countries, including Canada and Hong Kong, are now
signatories to the Multilateral Instrument ("MLI"). This
is designed as a multilateral overlay on bilateral tax treaties.
The general aim of the MLI is to make treaties more robust and
consistent. As of January 1, 2024 the MLI will apply to the tax
treaty between Hong Kong and Canada (the "Treaty").
The Principal Purpose Test
Hong Kong opted to implement the mandatory provisions of the
MLI, including Article 7(1) – the "principal purpose
test" ("PPT"). The PPT is an anti-avoidance measure
that is based on the subjective purpose of a transaction. In
applying the PPT, the question is whether it is reasonable
