Canada proposes retrospective correction to transitional CbCR safe-harbour anti-arbitrage rule

Canada has released a narrowly targeted amendment to its Global Minimum Tax Act (“GMTA”) that would broaden the circumstances in which an intra-group financing or investment arrangement must be neutralised when applying the transitional Country-by-Country Reporting (“CbCR”) safe harbour.

The proposal corrects the definition of a “deduction/non-inclusion arrangement” in subsection 47(1) GMTA. Although the amendment largely involves replacing a cumulative test with alternative conditions, it could affect whether an MNE group qualifies for the transitional CbCR safe harbour in Canada, including for fiscal years for which returns may already have been filed.

The amendment was published by the Department of Finance Canada on 23 July 2026 as part of a wider consultation on tax legislation. Comments are invited until 4 September 2026. 

The existing Canadian rule

Section 47 GMTA contains Canada’s implementation of the transitional CbCR safe harbour. Subject to the relevant conditions, the top-up amount of the constituent entities in a jurisdiction is deemed to be nil where the MNE group satisfies at least one of the following:

-the de minimis test;

-the simplified effective tax rate test; or

-the routine profits test.

The current statutory thresholds and other conditions are set out in section 47 GMTA.

Subsection 47(14) contains an anti-arbitrage adjustment. When applying the three safe-harbour tests, the jurisdiction’s profit or loss before income tax must exclude any expense or loss arising from either:

1. a deduction/non-inclusion arrangement; or

2. a duplicate loss arrangement.

Income tax expense arising from a duplicate tax recognition arrangement must similarly be excluded from qualifying income tax expense.

These adjustments prevent MNE groups from relying on post-15 December 2022 hybrid or duplicative arrangements to improve artificially the result of a transitional CbCR safe-harbour test. For example, an additional expense could reduce the jurisdiction’s CbCR profit before tax and thereby increase its simplified ETR or assist it in satisfying the routine profits test.

The problem with the current definition

Under the current wording of subsection 47(1), an arrangement entered into after 15 December 2022 is a deduction/non-inclusion arrangement where one constituent entity provides credit to, or otherwise invests in, another group entity and this produces an expense or loss in the financial statements of a constituent entity, to the extent that:

-there is no commensurate increase in the revenue or gain reported in the financial statements of the relevant counterparty;

-the counterparty is not reasonably expected to have a commensurate increase in taxable income over the life of the arrangement; and

-the expense or loss is not solely attributable to qualifying Additional Tier One capital issued under banking regulatory requirements.

The use of “and” between the first two substantive conditions means that both an accounting non-inclusion and an expected tax non-inclusion must currently exist before the arrangement is caught.

That is narrower than the OECD rule.

Paragraph 93 of Annex A, Chapter 1 of the OECD’s Consolidated Commentary provides that an arrangement is caught if there is either no commensurate accounting revenue or gain or no reasonable expectation of a commensurate increase in taxable income. The Additional Tier One capital exclusion then applies separately. Paragraphs 91–96 of the OECD Consolidated Commentary incorporate the hybrid-arbitrage guidance originally released in December 2023.

Consequently, the existing Canadian legislation does not currently capture an arrangement where only one of the following asymmetries exists:

-the counterparty recognises accounting income but is not expected to recognise corresponding taxable income; or

-the counterparty is expected to recognise taxable income but does not recognise a commensurate accounting gain or revenue.

The proposed amendment

The July 2026 proposal would restructure the definition so that an arrangement is caught where: