Canada issues its Budget 2025 Implementation Act, No. 2: UTPR, New Safe Harbours and OECD Administrative-Guidance Alignment

On May 6, 2026, Canada’s issued Bill C‑31 (Budget 2025 Implementation Act, No. 2) into Parliament.  Part 2 of the Bill amends the Global Minimum Tax Act to implement the UTPR, implement aspects of OECD administrative guidance, and make a number of technical amendments.

Bill C‑31 adds a new Part 2.1 UTPR to the Global Minimum Tax Act, with application generally for fiscal years beginning on or after December 31, 2025. Secondly, it introduces Canadian statutory versions of the new OECD Side-by-Side and Ultimate Parent Entity safe harbours, alongside changes to the transitional CbCR and transitional UTPR safe harbours. Thirdly, it embeds a large number of technical changes that track OECD administrative guidance, including rules on deferred tax liabilities, Article 9.1 transition-year deferred tax assets, blended CFC regimes, private investment entities, securitization entities, flow-through structures, currency translation, and asset impairments. Fourthly, it adds a treaty-override provision to the Income Tax Conventions Interpretation Act, making clear that Canadian tax treaties do not prevent the application of the Global Minimum Tax Act as amended, nor require Canada to provide treaty relief for similar foreign Pillar Two taxes.

Effective-dates

Legislative background

Canada enacted the Global Minimum Tax Act in 2024 as part of the first Budget 2024 implementation legislation. 

The existing Act implements the main GloBE provisions: a 15% minimum rate, a scope threshold based on consolidated revenue of at least €750 million in at least two of the four preceding fiscal years, and rules for determining constituent entities, relevant parent entities, jurisdictional effective tax rates, top-up tax and Canada’s domestic minimum top-up tax.

A key feature of the Canadian statute is its explicit interpretive linkage to the OECD materials. Existing subsection 3(1) provides that Part 2 and the relevant administrative provisions are intended to implement the GloBE Model Rules, the Commentary, and OECD administrative guidance ‘from time to time,’ and that the Act is to be interpreted consistently with those materials unless context otherwise requires. Bill C‑31 extends that interpretive framework to the new Part 2.1 UTPR.

Implementation of Canada’s UTPR

Part 2.1

Bill C‑31 introduces a new Part 2.1 to the Global Minimum Tax Act. The Part contains definitions, a charging rule, allocation rules, UTPR percentage rules, special rules for investment entities, joint ventures and stateless flow-through entities, and an initial-phase-of-international-activity exclusion.

The UTPR amendments apply to fiscal years of qualifying multinational enterprise groups beginning on or after December 31, 2025. For calendar-year MNE groups, that means the UTPR rules would generally first apply for the fiscal year beginning January 1, 2026, assuming enactment as introduced.

Charging rule

The new charging rule requires a person to pay tax under Part 2.1 in respect of a fiscal year of a constituent entity of an MNE group where the constituent entity is located in Canada, the MNE group is a qualifying MNE group, and the person is either the Canadian constituent entity itself or, under specified assumptions, the person that would include income of that constituent entity. The tax is equal to the Canadian UTPR top-up amount determined under the new allocation rules.

Total UTPR top-up amount and residual nature of the UTPR

The UTPR is residual. New section 49.6 provides that a constituent entity’s UTPR top-up amount is nil where the ultimate parent entity is subject to a qualified income inclusion rule or where all of the ultimate parent entity’s ownership interests in the relevant constituent entity are held, directly or indirectly, by relevant parent entities located in jurisdictions with qualified IIRs. Otherwise, the UTPR amount is reduced by relevant parent entities’ allocable shares of top-up tax under qualified IIRs.

As such, Canada’s UTPR is intended to collect residual top-up tax that remains after qualified IIRs and domestic minimum top-up taxes have operated. The Canadian statute achieves this partly through the new UTPR allocation rules and partly through the existing GloBE computation of jurisdictional top-up amounts, under which qualified domestic minimum top-up taxes are taken into account in computing residual top-up tax.

Canadian UTPR percentage

Bill C‑31 follows the GloBE design by allocating UTPR taxing rights using a two-factor formula: employees and tangible assets. The Canadian UTPR percentage is determined by reference to Canada’s share of employees and tangible assets among jurisdictions with qualified UTPRs in force for the year. The Canadian UTPR top-up amount is then allocated among Canadian constituent entities, excluding securitization entities, using a similar employee/tangible asset approach.

The bill includes a notable “cash tax” integrity rule: a jurisdiction can be treated as not having a qualified UTPR in force where a previous UTPR allocation to that jurisdiction has not resulted in an additional cash tax expense, subject to an exception that prevents all jurisdictions from being excluded on that basis. This rule is consistent with the policy that UTPR allocations should translate into actual tax collection rather than merely nominal allocation.

Investment entities, stateless flow-through entities and joint ventures

For UTPR allocation purposes, Bill C‑31 deems investment entities and insurance investment entities to have no employees or tangible assets. It also contains special rules for stateless flow-through entities, under which employees and tangible assets may be assigned to the jurisdiction where the entity was created if constituent entities of the group are located there; otherwise, they are generally disregarded.

The UTPR rules also apply to joint ventures and joint venture subsidiaries, with special provisions to determine when and how their top-up amounts enter the UTPR calculation. Canada is excluded from certain joint-venture computations where the relevant joint venture entity is located in Canada, reflecting the interaction with Canada’s domestic charging rules.

Initial phase of international activity exclusion

Bill C‑31 includes an initial-phase exclusion for groups with limited international activity. The bill defines the initial phase by reference to constituent entities in no more than six jurisdictions and tangible assets outside a reference jurisdiction not exceeding €50 million, and provides a five-year exclusion from UTPR top-up amounts where the conditions are met.

The Canadian drafting includes the anti avoidance carve-out rule where Canada is the reference jurisdiction. In that case, the exclusion does not operate in the same way for the Canadian computation: the bill deems Canada’s UTPR percentage to be 100% in specified circumstances and deems Canadian constituent entities’ own UTPR top-up amounts to be nil.

New safe harbours