2022-0926361C6 IFA 2022 - Q12 - Principal Purpose Test (PPT)

Principal Issues: 1) The numbers of matters in which CRA has recommended applying the PPT and whether GAAR is being applied. 2) Has CRA received any PPT ruling requests.

Position: 1) CRA has not to date issued assessment on the basis of the PPT. 2) Other than the one pre-ruling consultation request discussed at the 2021 IFA Conference, CRA has not to date received any other ruling or pre-ruling consultation request relating to the PPT.

Author: Moreno, Yves
Section: -

2022 International Fiscal Association Conference

CRA Roundtable

Question 12 - Principal Purpose Test

Could CRA please comment on the following:

1) The number of matters in which CRA has recommended applying the principal purpose test (“PPT”) and examples of situations in which it has done so. Please also indicate if the general anti-avoidance rule (“GAAR”) is being applied.

2) Has CRA received any PPT ruling requests?

CRA Response

The PPT is set out in article 7(1) of The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI entered into force for Canada on December 1, 2019, and entered into effect for a number of Canada’s tax treaties as early as January 1, 2020 (for taxes withheld at source on amounts paid or credited to non-residents), and as early as taxation years beginning on or after June 1, 2020 (for all other taxes).

(1) As indicated at the 2021 International Fiscal Association (“IFA”) Conference on May 5, 2021, in view of the international efforts which led to the MLI and its considerable importance to both tax administrations and taxpayers, the CRA has started monitoring compliance with the MLI on a priority basis in advance of the normal audit cycles. To date, the CRA has not issued any assessments on the basis of the PPT, although compliance review processes are underway.

With respect to the GAAR, the CRA took note of the decision that was rendered by the Supreme Court of Canada (“SCC”) in The Queen v. Alta Energy Luxembourg SARL (“Alta Energy”) (footnote 1) . The SCC considered a matter central to the CRA’s ongoing efforts to protect Canada’s tax base and the integrity of its tax treaties. The meaning and effect of the decision continues to be analyzed by the CRA, the Department of Finance and the Department of Justice as the processing of the files that were held in abeyance at different audit or litigation stages pending the decision of the Supreme Court in Alta Energy resumes.

In any situation where the CRA is considering the application of the PPT and/or the GAAR, the matter will be referred by the International and Large Business Directorate in the context of proposed assessments or by the Income Tax Rulings Directorate in the context of income tax ruling request, to the Treaty Abuse Prevention Committee (the “TAP” Committee) in accordance with its administrative policy (footnote 2) .      

The potential application of the GAAR and the PPT in each case will be examined in light of the directives provided by the Courts in different decisions where relevant as informed, amongst others, by the relevant facts, the taxpayer’s motives and the relevant tax treaty provisions. Practitioners may refer to the 2020 CTF Conference CRA Roundtable (footnote 3) for general guidance on determining whether any arrangement or transaction has, as one of its principal purposes, the obtaining of a treaty benefit. Similar guidance may apply to determine the primary purpose of a transaction under the GAAR.

In addition to the GAAR and the PPT, the CRA will consider where appropriate the taxpayer’s corporate residency, the application of judicial doctrines and anti-avoidance rules, either domestic or in the relevant bilateral tax treaty.

(2) The CRA received one pre-ruling consultation request with respect to the application of the PPT, the details of which can be found in our published response to the 2021 IFA Conference CRA roundtable questions (CRA document no. 2021-0887581C6). To date, the CRA has not received any other ruling or pre-ruling consultation request relating to the PPT.

Yves Moreno
2022-092636
May 17, 2022

Response prepared in collaboration with:
Suzanne Saydeh
Tax Avoidance Division, International and Large Business Directorate
Compliance Programs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Decision rendered on November 26, 2021; [2021 SCC 49]

2 As stated in the 2019 Canadian Tax Foundation (CTF) Conference CRA Roundtable, the responsibility to provide a recommendation in situation where a tax benefit emanates from a bilateral tax treaty was transferred from the GAAR Committee to the TAP Committee.

3   2020 CTF - Q6 - MLI and Principal Purpose Test (2020-0862471C6)

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