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.
Draft 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
Draft 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.
Draft 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)
Draft 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.
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. See Digital services tax (DST) in the Other taxes section for more information.
Sales tax and the digital economy
Draft 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 draft legislation will require 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 announced or 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.