Canadian global minimum tax, digital services tax and other international tax reforms

Canadian businesses and their owners face substantial international tax changes that are overwhelming in their volume and complexity. Significant changes that have been proposed globally and enacted in Canadian legislation are expected to have a major impact on Canadian businesses. Careful planning is needed to navigate this complex landscape, which introduces new taxes as well as onerous reporting obligations, to ensure compliance and avoid potential penalties and disputes.

Two developments, in particular, will fundamentally change the existing international tax framework in Canada and other countries. First is the enactment of the Global Minimum Tax Act (GMTA), which implements a 15% global minimum tax that is consistent with the OECD and G20’s Pillar Two. Second is the adoption of a 3% digital services tax (DST) as a backstop to the OECD and G20’s Pillar One. We have previously written about both the GMTA and the digital services tax in our Osler Updates.

Canadian taxpayers will need to adapt quickly to the changing landscape and proactively prepare for the initial stages of these measures, as well as other international tax changes in 2025.

Global minimum tax

Enacted in June 2024, the GMTA implements a Canadian global minimum tax on large multinational groups with consolidated revenues of at least €750 million, in accordance with Pillar Two from the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

The GMTA includes a domestic minimum top-up tax (DMTT) and an income inclusion rule (IIR) which took effect for fiscal years beginning on or after December 31, 2023. Together, these are intended to ensure that large multinational groups operating in Canada or headquartered in Canada pay tax at a rate of at least 15% on their income earned in Canada or through foreign subsidiaries and foreign branches, respectively.

The implementation of the UTPR in Canada raises the risk of potential trade retaliation by the United States, although a two-year elective safe harbour has been provided for jurisdictions (such as the United States) with a corporate tax rate of at least 20%.

An additional undertaxed profits rule (UTPR) is proposed to be effective for fiscal years beginning on or after December 31, 2024. We previously discussed the draft legislation to enact the UTPR in our Osler Update. The UTPR could apply a top-up tax on certain low-taxed income of foreign parent companies and foreign sister companies within a multinational group. The implementation of the UTPR in Canada raises the risk of potential trade retaliation by the United States, although a two-year elective safe harbour has been provided for jurisdictions (such as the United States) with a corporate tax rate of at least 20%.

Many multinational groups have already been required to disclose the potential impact of the GMTA and Pillar Two in their financial statements. The first due date for filing the GMTA information return in respect of the DMTT and the IIR is June 1, 2026. This aligns with the Canadian government’s estimate in its 2024 federal budget that the global minimum tax will increase revenues by $6.6 billion over three years starting in 2026. 

Canada has not yet drafted rules to integrate the GMTA with the domestic foreign affiliate rules. As a result, until such rules have been drafted and implemented, certain instances of double taxation may arise.

Digital services tax

Canada recently adopted a digital services tax with application to taxation years beginning in 2022. The Digital Services Tax Act (DSTA) came into force in June 2024.

Canada’s DST applies to Canadian revenue earned by large multinational groups from four defined sources: online marketplace services, online advertising services, social media services and user data. For all four categories, the revenue must generally involve a Canadian or a transaction or property that takes place in Canada to be in scope.

The United States’ trade representative has threatened to invoke tariffs or other retaliatory measures in response to Canada’s digital services tax, which they say unfairly targets U.S.-based multinationals.

Online marketplace services revenue includes transaction commissions, preferential listing services and subscription fees for using an online marketplace, such as ride sharing, online food ordering and short-term apartment rentals for tourists. An example of online advertising services revenue would be a fee earned by a social media platform when a user clicks on a targeted advertisement based on user data, such as their location or interests. Social media services revenue includes, for example, subscription fees to join a dating website and additional fees paid to a social media platform to remove advertisements. Finally, an example of revenues from user data would include revenues earned by a social media platform selling data collected from its users to third parties.

January 31, 2025, marks the first deadline to register under the DSTA. The registration requirement applies to taxpayers with at least $10 million of in-scope revenue and €750 million of global revenue earned by the consolidated group. The due date for the first payment and return under the DSTA is June 30, 2025. The payment and return due in 2025 are in respect of revenue earned for the period from 2022 through 2024. This may require planning to ensure sufficient cash flow to cover the one-time larger payment. The Canada Revenue Agency (CRA) has not yet released the form of DSTA return.

The United States has not reacted well to Canada’s adoption of the DST. The United States’ trade representative has threatened to invoke tariffs or other retaliatory measures in response to this unilateral measure, which they say unfairly targets U.S.-based multinationals. The risk of retaliatory measures is heightened by the recent election of President-elect Donald Trump. Canada has indicated that the DST is intended to be a temporary measure and will be repealed if Amount A of Pillar One comes into force. However, the OECD has already missed several announced deadlines in respect of the adoption of Amount A. Moreover, the United States has an effective veto over Amount A and it appears unlikely that it will support the implementation of Amount A in the near term or at all.

Other international tax measures

There are a number of other international tax changes that are expected to have a major impact in Canada.

EIFEL rules

Canada recently enacted the excessive interest and financing expenses limitation (EIFEL) rules. Generally, the EIFEL rules limit deductibility of interest and financing expenses where the net interest and financing expenses exceed a 30% adjusted EBITDA ratio. The first application of the rules is for taxation years beginning on or after October 1, 2023, with the first potential due date for the EIFEL information return being March 31, 2025, for taxpayers with September 30 taxation year ends. The EIFEL rules implement the OECD and G20’s BEPS Action 4 in Canada. Further information on the EIFEL rules can be found in our Osler Update.

The EIFEL information return will be Schedule 130 of the corporation and trust income tax return. The CRA has not yet released Schedule 130 or the various forms required to make an election under the EIFEL rules. In the meantime, however, the CRA has published administrative guidance describing how taxpayers can satisfy their reporting obligations or make such elections.

Hybrid mismatch rules

The hybrid mismatch rules enacted in 2024 implement aspects of BEPS Action 2 in Canada and can result in income inclusions or denied deductions in certain situations involving hybrid mismatch arrangements. Corporate taxpayers must file a hybrid mismatch rules information return for payments arising and dividends received from July 1, 2023, onward to which the new rules apply. The hybrid mismatch rules relevant for calculating foreign accrual property income (FAPI) will only apply to payments made from July 1, 2024, onward.

The CRA has not yet released the form of hybrid mismatch information return even though it is already potentially due for some taxpayers. Moreover, further revisions and additions to the hybrid mismatch rules, including for other aspects of the BEPS Action 2 report, are proposed to follow, although the timing of their release remains uncertain.

Details on both the hybrid mismatch rules and the impact on FAPI can be found in our Osler Update on the legislative proposals released in August 2024.

Mandatory disclosure rules

Canada expanded its mandatory disclosure rules in 2023. The new rules require taxpayers to file detailed information returns with the CRA for certain reportable or notifiable transactions that the government views as higher risk. The mandatory disclosure rules, together with the proposed expansion of the CRA’s audit powers, increase information flow to the CRA. This may significantly impact related audit activities and how taxpayers prepare for them.

For further insight on the disclosure rules for reportable or notifiable transactions, refer to our MDR guide.

General anti-avoidance rule

As we discussed in our 2023 Osler Legal Outlook article, Canada amended its general anti-avoidance rule (GAAR), effective as of 2024. The amendments include, among other things, a new “economic substance” test and a substantial penalty — 25% of the tax benefit claimed — which can be avoided if taxpayers voluntarily report the transaction to the CRA. As with the mandatory disclosure rules, the amendments to the GAAR and the potential application of a penalty further complicate the implementation of new international tax measures.

Several other significant changes to international tax law are expected in 2025. The federal government has proposed a new compliance order penalty, which we discuss in our other Osler Legal Outlook article. The government has also proposed amendments to Canada’s transfer pricing rules, which we discussed in our 2023 Osler Legal Outlook article, “Transfer pricing proposals infuse Canada’s tax laws with OECD concepts.”

Looking forward

The landscape of tax legislation in Canada is rapidly evolving. The coming years will mark numerous further changes to the international tax landscape with key dates that taxpayers and their advisors must track and prepare for with careful diligence. As with any new legislative measures, the current lack of guidance from Canadian courts creates uncertainty as to how some of these changes should be implemented and interpreted.

An added difficulty for international tax measures is the process and slow pace at which the OECD seems to be providing administrative guidance in respect of the Pillar Two and BEPS measures they initiated. This is exacerbated by the lack of domestic administrative guidance for those measures.

Finally, the impact of the political situation on these measures makes it difficult to predict whether further changes to some measures — particularly the GMTA and DSTA — will occur in light of opposition from the United States. The Canadian tax changes may also be impacted by the outcome of a federal election that will occur no later than October 2025.