Pillar 2 Dashboard: Canada

On August 13, 2025, Canada issued draft legislative proposals to amend its Global Minimum Tax Act to provide for aspects of the June 2024 and January 2025 OECD Administrative Guidance.

On August 12, 2024, draft legislative proposals (the ‘2024 Draft Law’) were issued to provide for the Under-Taxed Profits Rule (UTPR) for fiscal years beginning on or after December 31, 2024 (as well as limited other amendments for the Fourth Set of OECD Administrative Guidance).

On June 20, 2024, the Global Minimum Tax Act (included in the Budget Implementation Act 2024, No. 1) received royal assent. This includes provisions to implement an IIR and a QDMTT from December 31, 2023.

On August 4, 2023, Canada issued the draft Global Minimum Tax Act for consultation.

General

The law is split into five parts:

Part I – Interpretation and Rules of Application

Part II – Global Minimum Tax (Income Inclusion Rule (IIR))

Part III – QDMTT

Part IV – Anti-Avoidance

Part V – General Provisions, Administration and Enforcement

Part II does not, currently, contain any provisions for the implementation of the UTPR. The August 2024 Draft Law includes a new Part 2.1 into the Law to provide for the UTPR.

Part IV applies the anti-avoidance rule in Section 245 of the Income Tax Act for GloBE purposes.  This is a general anti-avoidance that amends the tax treatment (where it is reasonable to do so) to deny a tax benefit that would result, directly or indirectly, from a transaction or series of transactions.

Administrative Guidance

Aspects of the First Set of OECD Administrative Guidance included in the law are:

-Rebasing monetary thresholds in the GloBE Rules (Article 1.1)

-The deemed consolidation rules (Article 1.2)

-The exclusion of sovereign wealth funds from the definition of Ultimate Parent Entity (Article 1.4)

-Meaning of “ancillary” for Non-Profit Organisations (Article 1.6)

-The foreign exchange hedge election (Article 2.2)

-The rules for the asymmetric treatment of dividends and distributions (Article 2.3)

-The debt release election (Article 2.4)

-Provisions for accrued pension expenses (Article 2.5)

-Inclusion of deemed distributions for covered tax purposes (Article 2.6)

-Excess negative tax carry-forward guidance (Article 2.7)

-Substitute loss carry forwards (Article 2.8)

-The equity gain or loss inclusion election (Article 2.9)

-Rules for blended CFC Tax regimes (Article 2.10)

-The extension of the taxable distribution method election to insurance investment entities (Article 3.1)

-The exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity (Article 3.2)

-Provisions on restricted tier one capital for insurance companies (Article 3.3)

-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Article 3.4)

-The portfolio shareholding election (Article 3.5)

-The application of the tax transparency election to mutual insurance companies (Article 3.6)

-Deferred tax assets and tax credits under the transitional rules (Article 4.1)

-The transitional rules and transactions similar to asset transfers (Article 4.2)

-Asset carrying value and deferred taxes under the transitional rules (Article 4.3)

All of the Second Set of OECD Administrative Guidance (issued in July 2023) is included (aside from the UTPR Safe Harbour, as there is no provision for the UTPR in the law). Key aspects included are:

-The QDMTT Safe Harbour

-Marketable Transferable Tax Credits. The July 2023 Administrative Guidance, provides new rules that apply to transferable tax credits. A transferable tax credit is similar to a refundable tax credit and can generally be used to pay income taxes or can be sold to someone else and the proceeds used to pay its income taxes or other expenses. These rules are included in a new Section 18(16) of the law.

-An outstanding issue raised in the OECD Commentary to the Model Rules was the treatment of cases where employees perform work outside the employer’s jurisdiction and where tangible assets are located outside the jurisdiction of the Constituent Entity that owns or leases that asset.

The Second set of OECD Administrative Guidance suggests a simplified approach so that all of the payroll carve-out or tangible asset carve-out can be retained by the Constituent Entity where:

– an Eligible Employee is located within the jurisdiction of the Constituent Entity employer more than 50% of their working time; and

–  an Eligible Tangible Asset is located within the jurisdiction of the Constituent Entity owner more than 50% of the time.

Sections 32(4) and 32(13) of the law provide for this.

-Where the presentation currency of the MNE Group differs from the threshold currency in the domestic law of a jurisdiction, the Second set of Administrative Guidance provides that the MNE Group will translate its presentation currency to the threshold currency based on the average foreign exchange rate for December of the previous Fiscal Year. This is included in Section 7(2) of the law.

-As GloBE calculations are based on the presentation currency of the MNE Group’s Consolidated Financial Statements, Top-Up Tax under an IIR or the UTPR may need to be translated into local currency of the implementing jurisdiction for assessment/payment.

The Second set of Administrative Guidance states that local jurisdictions are to determine their own foreign currency translation rules for this, provided the exchange rate is considered ‘reasonable’.

Jurisdictions may choose to use:

 – The average foreign exchange rate for the Fiscal Year;

 – The foreign exchange rate on the last day of the Fiscal Year;

 – The foreign exchange rate on the date payment is required; or

 – Any other reasonable basis.

Section 7(3) of the law clarifies that in this case the average for the fiscal year of the daily rates of exchange quoted by the Bank of Canada are to be used. If there is no daily rate quoted by the Bank of Canada for a particular day, a daily rate of exchange acceptable to the Tax Authority is to be used.

Aspects of the Third Set of OECD Administrative Guidance (issued in December 2023) are also included, including the amendments to the Transitional CbCR Safe Harbour and the amendments to Blended CFC Regimes.

Limited aspects of the Fourth Set of OECD Administrative Guidance are included in the 2024 Draft law. This relates to the top-up tax/QDMTT exclusion for Securitization Entities as well as the flow through entity provisions that include rules relating to non-group owners and minority ownership.

Key amendments in 2025 draft law from the June 2024 OECD Administrative Guidance include:

Article 1.2.2 – 5 year unclaimed accrual election

Article 4.1 – Extension of the Substitute Loss Carry-forward DTA to PEs, hybrids and Reverse hybrids

Article 4.2 – Allocation of deferred tax expenses and benefits from a Parent Entity to a CFC, PE Hybrid or Reverse Hybrid

Article 4.2.2 – Five-Year Election to exclude the allocation of all deferred tax expenses and benefits to CFCs, PEs, Hybrids and Reverse Hybrids

Article 4.2.3 – Exclusion of deferred tax assets or liabilities arising under a Blended CFC regime from transition rules

Article 5.6.2 – Extension of taxes pushed down to include Reverse Hybrids

Article 6.1.4 – Amendments to the Switch-Off rule

The 2025 draft law also confirms that other aspects apply due to the interpretation of the Minimum Tax Act, and includes minor amendments to facilitate this, including:

Article 1.2 – Amendments for the recapture exception accruals including the Aggregate DTL Category basis etc

Article 2.1 – GloBE and accounting carrying values

Section 1(12) 2025 Draft Law includes the deferred tax recognition amendments to Articles 9.1 of the GloBE Rules in the January 2025 OECD Administrative Guidance (including the grace period for DTA reversals).

Safe Harbour and Penalty Relief Guidance

The law provides for the application of the main OECD Safe Harbours.

This includes the:

-Transitional CbCR Safe Harbour;

-QDMTT Safe Harbour;

-Simplified calculation for Non-Material Constituent Entities Safe Harbour.

The Safe Harbours tie in with the OECD guidance in its published Safe Harbour Guidance and the July 2023 and December 2023 Administrative Guidance. Therefore, the various amendments to the Transitional CbCR Safe Harbour in the December 2023 Administrative Guidance are reflected. This includes:

-Additional provisions for JVs

-MNEs not required to file CbC Reports

-Qualified Financial Statements for PEs

-Treatment of Hybrid Arbitrage Arrangements

Section 44 of the law provides for the application of the QDMTT Safe Harbour. It does not specifically include the Switch-Over rules, but effectively applies the Safe Harbour where an election is made and the jurisdiction’s QDMTT has QDMTT Safe Harbour status as determined by the Inclusive Framework and published on the website of the OECD. It also specifically applies where a jurisdictions QDMTT has transitional qualified status, as outlined in the June 2024 guidance on Qualified Status under the Global Minimum Tax Rules. The 2025 Draft Law includes a Switch Off rule. 

The Transitional UTPR Safe Harbour is included in Article 47.1 of the August 2024 Draft Law.

ELECTIONS

Elections in the OECD Model Rules

The law includes all of the key elections as provided in the OECD Model Rules, including:

-Excluded Entity Election (S13(2) of the law)

-Election to use the Realization Method (S20 of the law)

-Stock-Based Compensation Election (S19 of the law)

-Election to Spread Capital Gains (S21 of the law)

-Consolidation Election (S22 of the law)

-GloBE Loss Election (S26 of the law)

-Tax Transparency Election (S41 of the law)

-Taxable distribution Election (S42 of the law)

-Unclaimed Accrual Election (Part I – Definitions)

-Distribution Tax Regime Election (S37 of the law)

-Substance-Based Income Exclusion Election (S32(16) of the law)

-Prior Year Adjustment Election (S27(1)(c) of the law)

-De minimis Election (S33 of the law)

-Transitional CbCR Safe Harbour Election (S47(2) of the law)

Elections in the Administrative Guidance

All other elections included in the OECD Administrative Guidance are specifically included in the legislation. This includes the:

-Debt Release Election (S23 of the law)

-Foreign Exchange Hedge Election (S18(6) of the law);

-Portfolio Shareholding Election (S18(3) of the law);

-Excess Negative Tax Carry-Forward Election (S31(5) of the law);

-Equity Investment Inclusion Election (S18(7) of the law).

-QDMTT Safe Harbour Election (S44 of the law)

New Elections

Section 48(9) of the law includes a new election not to use the carrying value for certain intra-group asset transfers before the transition year. This is similar to the election in Paragraph 2(7) of Schedule 16 of the UK’s enacted Pillar Two law.

DEVIATIONS FROM THE OECD MODEL RULES/EU GLOBAL MINIMUM TAX DIRECTIVE

The Canadian law includes all of the key aspects of the OECD Model GloBE rules (aside from the UTPR aspects). As noted above, a number of aspects of the Second set of OECD Administrative Guidance are not included.

Aside from this, key points to note are:

Pushdown Accounting

Purchase accounting adjustments are ignored. Therefore, there is no rebasing of assets and liabilities on a share acquisition.

Where pushdown accounting applies so that adjustments to the value of assets and liabilities are reflected in the accounts of the acquired company, the Pillar Two Commentary allows the acquisition entity to use these values for Pillar Two purposes, providing the acquisition occurred before 1 December 2021 and the MNE Group does not have sufficient records to determine its Financial Accounting Net Income or Loss with reasonable accuracy based on the unadjusted carrying values of the acquired assets and liabilities.

The law includes a specific adjustment to GloBE income to provide for this.

New Election

Section 46(9) of the law includes a new election not to use carrying value for certain intra-group asset transfers before the transition year.

Acceptable Accounting Standard

It should also be noted that the definition of an acceptable accounting standard excludes Russia (unlike the OECD Model Rules).

Deconsolidation rules for Private Investment Entities

New subsection 9(2.1) of the 2025 Draft Law implements a de-consolidation rule in respect of certain qualifying MNE groups that include one or more private investment entities.

A private investment entity is generally an entity located in Canada that is not publicly listed, that controls a Canadian-located publicly listed corporation and that produces only unconsolidated financial statements under the Canadian Accounting Standards for Private Enterprises (or is a member of a group the ultimate controlling entity of which prepares only unconsolidated financial statements).

Where it is determined that a private investment entity would be a constituent entity of a qualifying MNE group in the absence of subsection (2.1), the rules effectively de-consolidate the private and public subgroups of the MNE group for GloBE purposes.

This is achieved by deeming any private investment entity not to have a controlling interest in any Canadian-located publicly listed corporation. By severing the control link between the private entities and the publicly listed corporation(s), the MNE group is split into multiple smaller groups. The one or more private investment entities in the group (together with any private entities they control) form a new group; and each publicly listed entity, together with any entities it controls, forms a separate group with the publicly listed entity as its ultimate parent entity.

DOMESTIC MINIMUM TAX

General

Part III of the law provides for a QDMTT (or at least a domestic minimum tax that is likely to be classed as a QDMTT) for fiscal years beginning on or after December 31, 2023.

QDMTT Design Features

The domestic minimum tax is based on the top-up tax calculation for GloBE purposes, as amended. The amendments include not ‘pushing down’ taxes to PEs, CFCs and Hybrids.

The law also excludes a tax allocation from the owner of a constituent entity (CE) on dividends paid by the CE unless the tax charge applies under the Canadian Income Tax Act (eg Canadian withholding tax). 

The Canadian QDMTT applies the general GloBE rules to determine the accounting standard used. As such, the domestic minimum tax is calculated using the financial accounting standard of the UPE, and, if that is not practicable, on the basis of an accepted accounting standard or an approved accounting standard, if:

                -the constituent entity’s financial statements are prepared in accordance with that standard,

                 -the information contained in the financial statements is reliable; and

                 -permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

The Second set of OECD Administrative Guidance also provides that where not all Constituent Entities in the jurisdiction use the local currency as their functional currency, the Filing Constituent Entity may make a Five-Year Election to undertake the QDMTT computations for all Constituent Entities in the jurisdiction either:

-in the presentation currency of the Consolidated Financial Statements; or

-in the local currency.

This is not included in the Canadian domestic minimum tax.

As required in the OECD Administrative Guidance, Section 52)(e) of the law also requires that any GloBE election made (or revoked) is taken into account for QDMTT purposes, if the election is included in a GloBE Information Return that would affect the top-up tax calculation.

The 2024 Draft Law reflects the Fourth Set of OECD Administrative Guidance and excludes Securitization Entities from the scope of the domestic minimum tax.

Registration

The law does not include provisions for registration.

Filing

The relevant aspects of the submission of a GloBE Information Return (GIR) are included, as provided in the OECD Guidance

The proposed approach is that every Constituent Entity located in Canada will have an obligation to file a GIR in Canada. However, this obligation can be discharged if the GIR is filed by:

-The Ultimate Parent Entity, or

-The Designated Filing Entity.

Where the GIR is being filed by either the Ultimate Parent Entity or the Designated Filing Entity, the Constituent Entity, must file a notification with the Revenue.

The notification must contain:

-Details of the entity that is filing the GIR, and

-The jurisdiction in which such an entity is located.

Where the GIR is filed by the Designated Local Entity it needs to outline the Constituent Entities that it is filing on behalf of.

Both the GIR and associated notifications must be filed no later than 15 months after the end of the fiscal year (with an 18-month deadline for the Transition Year). As provides in the December 2023 Administrative Guidance, this cannot be before June 30, 2026 under Article 55 of the law.

Section 61 of the law also requires submission of an additional domestic top-up tax return and self- assessment return (referred to as a ‘GloBE Top-Up Tax Return’) where top-up tax is payable.  The same filing deadline applies for the GloBE Top-Up Tax Return as for the GloBE Information Return.

Payment

The top-up tax liabilities must be paid by the filing date for the GloBE Information Return and the GloBE Top-Up Tax Return under Section 64 of the law (i.e. 15 months after the end of the Fiscal Year, extended to 18 months in the first year).

Penalties

Section 98 of the law provides for a number of penalties for breaches of the GloBE rules. The standard late-filing penalty is 25,000 CAD for each month the return is late (up to a maximum of 40 months).

Failure to file a GIR or top-up tax return can result in tax-geared penalties up to 25% of the top-up tax due.

No returns issued yet.