Canada

Corporate - Significant developments

Last reviewed - 01 December 2021

Canada's corporate tax summary reflects all 2021 federal, provincial, and territorial budgets. This summary is based on enacted and proposed legislation and assumes that the proposed legislation will become law. Generally, budget proposals and draft legislation are enacted into law, even with a minority federal government, which is currently the case. For further details of the proposed new business tax measures noted in the summary, see our Tax Insights ‘2021 Federal budget: From pandemic to recovery’ at www.pwc.com/ca/budget.

Mandatory disclosure rules

The 2021 federal budget proposes to enhance Canada’s mandatory reportable transaction disclosure rules, subject to public consultation, for taxation years beginning after 2021. See Mandatory disclosure rules in the Tax administration section for more information.

Interest deductibility limits

The 2021 federal budget proposes to limit the amount of net interest expense that a corporation may deduct in computing its taxable income to the greater of a fixed ratio or group ratio of its ‘tax EBITDA’ (taxable income before interest expense, interest income, income tax, and deductions for depreciation and amortisation), to be phased in starting taxation years beginning after 2022. See Interest deductibility limits in the Group taxation section for more information.

Derivatives

Recently enacted legislation amends the definition of 'derivative forward agreement' to prevent fully taxable ordinary income from being recharacterised into more favourably taxed capital gains under these agreements, in certain cases, for transactions generally entered into after 18 March 2019. See Derivatives in the Income determination section for more information.

Foreign affiliate dumping rules

Recently enacted legislation extends the foreign affiliate dumping rules to Canadian-resident corporations controlled by non-resident individuals, non-resident trusts, or a group of non-resident corporations, individuals, and/or trusts who do not deal with each other at arm's length, for transactions or events occurring after 18 March 2019. See Foreign affiliate dumping rules in the Income determination section for more information.

Transfer pricing

Recently enacted legislation introduces a new ordering rule to prioritise transfer pricing adjustments, and broadens the definition of a 'transaction' for purposes of the extended reassessment period that applies to non-arm's-length cross-border transactions, for transactions beginning after 18 March 2019. See Transfer pricing in the Group taxation section and Statute of limitations in the Tax administration section for more information.

Hybrid mismatch arrangements

The 2021 federal budget proposes to eliminate the tax benefits from hybrid mismatch arrangements, which are cross-border transactions that are characterised differently under the tax laws of different countries. Specifics are forthcoming, and the rules are expected to apply for certain rules on 1 July 2022 and for other rules no earlier than 2022. See Hybrid mismatch arrangements in the Group taxation section for more information.

Cross-border securities lending arrangements (SLAs)

Recently enacted legislation modifies the withholding tax (WHT) rules for dividend compensation payments that a Canadian borrower makes to a non-resident lender under an SLA, to address planning undertaken by certain non-residents that attempts to avoid the Canadian dividend WHT, for dividend compensation payments generally made after 18 March 2019. See Cross-border SLAs in the Income determination section for more information.

Global minimum tax and the new international tax framework

On 8 October 2021, the Organisation for Economic Co-operation and Development (OECD) announced that 136 countries, including Canada, had committed to fundamental changes to the international corporate tax system that support the OECD Inclusive Framework's 'Tax Challenges Arising from Digitalisation' project. The changes would provide new taxing right that:

  • reallocate some portion of the profits of large multinational enterprises (MNEs) to counties where the MNE's customers are located (Pillar One), and
  • adopt a global minimum effective tax rate of 15% (Pillar Two).

These two pillars are to generally come into effect 2023. See Global minimum tax and the new international tax framework in the Other taxes section and our Tax Insights 'The new international tax framework and Canada's digital services tax' at www.pwc.com/ca/taxinsights for more information.

Digital services tax

The federal government is proposing to implement a tax on certain corporations that provide digital services in Canada, effective 1 January 2022. However, the tax would only be imposed if a multilateral convention implementing Pillar One (see Global minimum tax and the new international tax framework above) has not come into force by 31 December 2023; in that event, Canada would start imposing the tax on 1 January 2024, in respect of in-scope revenues earned since 1 January 2022. See Digital services tax (DST) in the Other taxes section and our Tax Insights 'The new international tax framework and Canad's digital services tax' at www.pwc.com/ca/taxinsights for more information.

Sales tax and the digital economy

Recently enacted legislation that affects the Goods and Services Tax/Harmonised Sales Tax (GST/HST) regime addresses the digitisation of the global economy and is intended to ensure that the GST/HST applies to all goods and services consumed in Canada regardless of how they are supplied or who supplies them. Among other GST/HST measures, the legislation requires foreign-based digital businesses (that are not required to register under the current GST/HST rules) that supply digital products and services to consumers in Canada to register for and collect GST/HST under a new simplified GST/HST regime starting 1 July 2021. The provinces of British Columbia, Manitoba, Quebec, and Saskatchewan have implemented similar changes to their provincial sales tax regimes. See GST/HST and the digital economy and Provincial retail sales tax (PST) under Consumption taxes in the Other taxes section and our Tax Insights ‘Indirect tax hot topics: Do they impact your business? (8 April 2021)’ at www.pwc.com/ca/taxinsights for more information.