The federal government on Wednesday joined a large number of other jurisdictions in signing an international tax treaty designed to prevent multinationals from improperly avoiding taxes by arbitraging various countries' tax rules.
Almost 70 countries have signed onto a convention developed by the Organisation for Economic Co-operation and Development (OECD) and the G20 project to combat a form of tax avoidance known as base erosion and profit shifting (BEPS).
"BEPS refers to aggressive tax planning arrangements undertaken by multinational enterprises which, though legal, exploit the interaction between domestic and international tax rules to inappropriately reduce their taxes," the Department of Finance Canada says in a statement. "For example, some enterprises will shift their taxable profits away from the jurisdiction where the underlying economic activity has taken place in order to avoid paying their fair share."
Once it's ratified, the agreement will modify existing bilateral tax treaties to adopt measures designed to combat BEPS strategies, and to improve dispute resolution, among other provisions.
"Canada will opt for the ‘principal purpose test' as a substantive technical rule … [which] has the effect of denying a benefit under a tax treaty where one of the principal purposes of an arrangement or transaction that has been entered into is to obtain a benefit under the tax treaty," the Finance department notes.
The government says that the effort to address tax loopholes reflects both its international commitments and its pledge to enhance the fairness of the domestic tax system.
"As an early signatory to this international agreement today, Canada is at the forefront of global action to improve international tax rules, and work towards a more fair and transparent tax system," says Ginette Petitpas Taylor, parliamentary secretary to the minister of finance, in a statement.