Canada’s 2023 federal budget presented on 29 March 2023 does not contain any significant new international tax measures or changes to corporate income tax rates, but there are draft legislative changes to the general anti-avoidance rule and various clean energy incentives (click here for a comprehensive analysis of the budget measures by BDO in Canada). However, budget 2023 does provide updates on some previously announced tax measures and international tax reform under Pillar One and Pillar Two; this alert summarises the measures that will be introduced and that will impact organisations that operate internationally.
Pillar One and Pillar Two
Consistent with previous budgets, the government reaffirmed its commitment as part of the OECD BEPS initiative. Canada is one of the 138 member countries to have joined a two-pillar plan on international tax reform.
Pillar One will ensure that large multinational corporations will reallocate taxing rights of profits to jurisdictions where their users and customer base are located. Budget 2023 confirms that the government is actively working with its international partners to develop the multilateral convention to bring the new rules into effect by mid-2023, with a view to them entering into force in 2024. To ensure that Canadians' interests are protected, the government released draft legislative proposals for a Digital Services Tax (DST) in December 2021 (for prior coverage, see the article in the December 2020 issue of Indirect Tax News).
We anticipate updated DST legislation to be introduced later in 2023. The DST could be imposed as of 1 January 2024, but only if the multilateral convention implementing the Pillar One framework has not come into force. In that event, the DST would be payable as from 2024 in respect of revenues earned as from 1 January 2022.
Pillar Two will ensure that multinational enterprises with annual revenues exceeding EUR 750 million are subject to a minimum effective tax rate of 15% on their profits globally. The 2023 budget reaffirms Canada's intention, announced in Budget 2022, to introduce legislation implementing the Pillar Two global minimum tax (for prior coverage, see the article in the May 2022 issue of Corporate Tax News). The primary charging rule of Pillar Two and a domestic minimum top-up tax would be effective for fiscal years of multinational corporations that begin on or after 31 December 2023.
The secondary charging rule, the undertaxed profits rule, would be effective for fiscal years beginning on or after 31 December 2024. The government will continue to monitor international developments as it moves forward with implementing Pillar Two.
On 3 November 2022, the government released its latest version of draft legislation relating to the excessive interest and financing expenses limitation (EIFEL), which will affect multinational corporations, cross-border investments, and other Canadian public and private enterprises. As currently proposed, the EIFEL rules will limit the deductibility of net interest expense to a fixed ratio of 30% of taxable income before interest, taxes, depreciation and amortisation (tax EBITDA). The government is expected to introduce the draft legislation as a bill later this year, with the rules currently set to apply for taxation years beginning on or after 3 October 2022.
Hybrid mismatches / transfer pricing
Hybrid arrangements can be used to exploit tax differences between Canadian and foreign tax laws. Budget 2021 proposed to eliminate the tax benefits from hybrid mismatch arrangements. Draft legislation was released in April 2022 but has yet to be tabled in a bill.
Also in budget 2021, the government announced its intention to consult on Canadian transfer pricing rules given recent court decisions. However, the consultation paper is yet to be released.