The Global Minimum Tax Act (“GMTA”) was enacted on June 20, 2024 as part of Canada’s implementation of the Pillar Two OECD initiative. It consists of two principal taxes:
- Income Inclusion Rule (“IIR”) – a 15 per cent top-up tax
- Qualified Domestic Minimum Top-up Tax (“QDMTT”) – also a 15 per cent tax
Notably, in this release, Canada did not adopt the Undertaxed Profit Rule (“UTPR”), which is also included in the OECD model.
UTPR introduction
The proposed legislation introduces the UTPR rules which are designed to backstop the IRR and QDMTT. This employs a formulaic approach to calculate the total UTPR top-up amount, Canadian top-up amount and UTPR top-up amount for constituent entities in Canada. An exclusion from the UTPR top-up payment is available during the initial phase of international activity. UTPR rules are proposed to apply to fiscal years of qualifying multinational enterprise (MNE) groups beginning on or after Dec. 31, 2024.
UTPR safe harbour election
The UTPR safe harbour election is a transitional measure allowing for a top-up tax in the jurisdiction of the ultimate parent entity (UPE) to be deemed nil, provided certain conditions are met:
- An election for the UPE jurisdiction is made.
- The corporate income tax rate of the UPE jurisdiction is 20 per cent or greater.
- The fiscal year begins before Jan. 1, 2026, and ends before Dec. 31, 2026.
This safe harbour provides additional time before the UTPR takes effect in countries without qualifying Pillar 2 rules, the most important example being the United States.
QDMTT exclusions
Canada has opted to exclude “securitization entities” from the QDMTT, following the Fourth Administrative Guidance (“Fourth AG”). A new definition of “securitization entity” has been introduced, aligning with the Fourth AG.
Amendments clarify that a QDMTT is not payable by a securitization entity, and such entities are not liable under the GMTA. Due to this exclusion, the OECD’s “switch off” rule applies, potentially subjecting Canadian securitization entities to a top-up tax under the IIR or UTPR in other jurisdictions.
Flow-through entities
The definition of a “reverse hybrid entity” is repealed and additional amendments have been made to align with the Fourth AG’s approach to flow-through entities.
Outstanding implementation and technical concerns:
- While Canada has implemented much of the Fourth AG from the OECD, there are still material components of this framework to be introduced.
- There is significant crossover with Canada’s existing tax treaties, so understanding which set of rules (tax treaties vs. UTPR) overrides the other is important to consider in each individual scenario.
Contact your Baker Tilly advisor to learn more about how we can help you navigate the complexities of the Canadian tax system.
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