CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
9.4 Competitive Tax Policy Objectives Canada recognises the significance of business income tax in improving the country’s international competitiveness, believing that certain BEPS Actions will enhance Canada’s international competitiveness. Canada remains committed to ensuring that its tax policies are aligned with international standards to attract foreign investment and prevent base erosion. 9.5 The Competitive Tax System Canada has implemented a number of tax incentives to support Canadian businesses, including income tax credits for Scientific Research and Experimental Development (SR&ED) activities. Budget 2025 further enhanced these credits under the SR&ED programme by increasing the eligibility thresholds, raising the expenditure limits, extending eligibility to certain public corporations, and restoring the eligibility of capital expenditures. In addition, the annual expenditure limit for the enhanced 35% credit will be increased to CAD6 million for taxation years BEPS Action 2 seeks to neutralise the effect of cross- border hybrid mismatch arrangements that produce multiple deductions for a single expense or a deduc - tion in one jurisdiction with no corresponding taxation in the other jurisdiction. Canada implemented hybrid mismatch rules in line with the recommendations in, and generally consist - ent with, BEPS Action 2, the rules of which came into effect on 1 July 2022. Under these rules, payments made by Canadian residents under hybrid mismatch arrangements would not be deductible for Canadian income tax purposes to the extent that they give rise to a deduction/non-inclusion mismatch (eg, either by way of the payment giving rise to a deduction or not being included in the ordinary income of the non- resident recipient). Conversely, to the extent that a payment made under such an arrangement by a non- resident of Canada is deductible for foreign income tax purposes, no deduction in respect of the payment would be permitted against the income of a Canadian resident. Any amount of the payment received by a beginning on or after 16 December 2024. 9.6 Hybrid Instruments and BEPS Implementation
Canadian resident would also be included in income, and, if the payment is a dividend, it would not be eli - gible for the deduction otherwise available for certain dividends received from foreign affiliates (FAs). In January 2026, Canada released proposed amend - ments implementing most of the remaining recom - mendations of BEPS Action 2 to address hybrid mismatches arising from the hybridity of the entities involved. These proposed amendments are expected to take effect on 1 July 2026. Canada also relies on the GAAR to prevent undue tax benefits. 9.7 Interest Deductibility and Territorial Tax Regime Canada has a worldwide tax regime for resident cor - porations’ income but has some aspects of a territo - rial tax regime for its FAs. For example, all dividends derived from active income earned by an FA will be fully exempt from tax in Canada if the FA is a resident of, and earns active income in, a country with which Canada has a tax treaty or a tax information exchange agreement. However, passive investment income earned by an FA – typically interests, royalties, rents and certain capital gains – will be taxable in Canada regardless of whether or not the profits are repatriated. These foreign accrual property income (FAPI) rules ensure that passive income is taxed on a current basis to miti - gate the tax advantage of shifting domestic income to low-tax jurisdictions. 9.8 Controlled Foreign Corporation Reform This issue is not applicable in Canada. Canada’s exist - ing CFC rules are considered comprehensive and Recent case law on the application of the GAAR to perceived abuse of a tax treaty concluded that wheth - er or not the income is subject to taxation in a for - eign jurisdiction (double non-taxation situation) and the residence of the ultimate shareholder were irrel - evant in determining if a transaction is abusive, and align with BEPS principles. 9.9 Anti-Avoidance Rules
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