Pillar Two: Canada’s Global Minimum Tax Act explained

Updated: September 24, 2024

Canadian entities of certain large multinational enterprise (MNE) groups may be subject to a top-up tax, under Canada’s newly enacted global minimum tax (GMT) rules. Canada’s GMT rules are intended to ensure certain large MNE groups pay a minimum ETR of 15%, determined on a jurisdiction-by-jurisdiction basis, on profits earned by one or more group entities in each country. If the ETR for any country is below 15%, generally a top-up tax applies to make up the difference, subject to a substance-based income exclusion. This exclusion is based on a percentage of the group’s tangible assets and payroll costs in the country.  

These GMT rules are Canada’s version of the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two, which is part of their plan to coordinate a multinational approach to global tax reform. 

The enacted GMT rules currently include two tax measures: a top-up tax under the income inclusion rules (IIR) which may apply to Canadian-based parent entities with foreign subsidiaries, as well as a qualified domestic minimum top-up tax (QDMTT) which may impose a tax on Canadian-sourced profits. These rules, along with applicable reporting and filing requirements, were enacted under Canada’s Global Minimum Tax Act (GMT Act), which received Royal Assent on June 20, 2024. 

The GMT rules are generally effective for fiscal years that begin on or after December 31, 2023, and the first returns and potential taxes are due as early as June 30, 2026. MNE groups that fall within scope of the GMT will need to gather a high volume of data on a per-country basis (which may not be readily available) to carry out complex calculations. To help determine the impact of the new GMT rules on your business, contact your local advisor.

Proposed amendments 

Amendments to these rules were proposed in draft legislation released on August 12, 2024. Most notably, the proposals introduce a third tax measure that allows the government to collect a top-up tax under the undertaxed profits rule (UTPR), as well as a related safe harbour. In addition, the draft legislation proposes an amendment to the Income Tax Conventions Interpretation Act. This change would ensure that, when applying a provision of a tax treaty that Canada has with another jurisdiction, nothing prevents the application of the GMT Act or obliges Canada to provide relief for tax imposed under similar GMT laws in the other jurisdiction.

The GMT rules, including the IIR, QDMTT and the proposed UTPR, closely follow the OECD’s Global Anti-Base Erosion (GloBE) model rules (GloBE model rules). 

Is my business subject to the GMT rules?

Certain large MNE groups generally fall within the scope of Canada’s GMT rules for a particular fiscal year if the following conditions are met:  

• The MNE group has at least one entity or permanent establishment located in Canada (in addition to a foreign country). 
• The revenue reported in the group’s consolidated financial statements is €750 million or more in at least two of the four fiscal years immediately preceding the particular fiscal year.
• The group isn’t composed entirely of excluded entities (such as non-profit organizations, pension funds, ultimate parent entities that are real estate investment vehicles or investment funds, amongst others). 

The €750 million revenue threshold is prorated for short fiscal years.    

How is the top-up tax calculated?

To determine if the top-up tax applies for a particular fiscal year, in-scope MNE groups must first calculate their ETR in each country in which they operate. 

To calculate its ETR for a particular jurisdiction, an MNE group would divide its “adjusted covered taxes” by its “net GloBE income” for that jurisdiction. These inputs are based on the relevant entities’ financial statements that are used in the ultimate parent entity’s consolidated financial statements. These are further subject to various adjustments outlined in the GMT rules. This means the top-up tax can apply in jurisdictions where the statutory tax rate exceeds 15% (e.g., due to permanent book-to-tax differences or tax incentives not permitted under the GMT rules).      

Which entities pay the top-up tax?

Under Canada’s GMT rules, the top-up tax is collected in one of the following ways:

• Qualified domestic minimum top-up tax (QDMTT): Entities and permanent establishments located in Canada are generally subject to a domestic minimum top-up tax, where the qualifying MNE group’s Canadian ETR is below 15%. The QDMTT is imposed in priority to the IIR (or UTPR) to generally allow Canada primary taxing rights to collect a top-up tax on Canadian-sourced income.
• Income inclusion rule (IIR): The ultimate parent entity (or an intermediate parent in certain cases) is generally subject to the top-up tax in respect of income earned in a foreign country, where the qualifying MNE group’s ETR in respect of that country is below 15%. In cases where the ultimate parent entity (or intermediate parent entity) is resident in Canada, Canada should impose the IIR. However, if that foreign country has a QDMTT in place, tax under the IIR is generally deemed to be nil for this purpose. 

Proposed undertaxed profit rule (UTPR):  If enacted, in-scope Canadian entities within an MNE group will generally be subject to a top-up tax (based on a formulaic allocation) on foreign-sourced undertaxed profits, where an IIR or QDMTT doesn't apply to those profits. The UTPR may apply in cases where(i) the ETR in a foreign jurisdiction is less than 15%, that jurisdiction hasn’t enacted its own QDMTT, and there’s no ultimate parent entity or intermediate parent entity in respect of the entity or entities that earned the undertaxed profits. This proposal was introduced as part of the August 12 draft legislation to apply to fiscal years beginning on or after December 31, 2024. 

A local country’s QDMTT takes priority over any IIR imposed on a parent entity, with the UTPR designed as a back-stop in case no QDMTT or IIR applies, which is consistent with the OECD’s Pillar Two framework.

Is any relief available under the GMT rules?  

Canada’s GMT rules include certain safe harbour provisions that provide temporary or permanent relief in certain circumstances. These safe harbours generally mirror those in the GloBE model rules. If a safe harbour applies, an election must be filed as part of the annual GloBE information returns. The following safe harbours are available under the GMT rules:

• Permanent QDMTT safe harbour: This rule generally deems the top-up tax to be nil for a particular entity in the MNE group if that entity is in a jurisdiction with an acceptable QDMTT in place and a valid election is filed. 
• Permanent simplified calculations safe harbour: This rule generally deems the top-up tax to be nil for an MNE group’s non-material constituent entities (NMCEs) for a particular jurisdiction, provided certain conditions are met and a valid election is filed. An NMCE is generally an entity that isn’t consolidated in the ultimate parent entity’s consolidated financial statements solely based on size or materiality.  
• Transitional country-by-country reporting safe harbour: This rule generally deems the top-up amount to be nil for certain low-risk jurisdictions and simplifies calculations for that jurisdiction if certain requirements are met and a valid election is filed. This temporary relief is only available for fiscal years that begin before January 1, 2027 and end before July 1, 2028. 
• Proposed transitional UTPR safe harbour: If enacted, this rule generally deems the top-up amount to be nil for each constituent entity and joint venture in respect of the MNE group that is located in the ultimate parent entity jurisdiction, if certain conditions are met and a valid election is filed. This proposed transitional UTPR safe harbour should be available for fiscal years that begin before January 1, 2026 and end before December 31, 2026.

Additionally, eligible MNE groups in the “initial phase of international activity” may be relieved from Canada’s QDMTT for up to five years under Canada’s GMT rules, provided certain conditions are met and no foreign IIR applies.  

These safe harbour rules are complex. We can help you navigate these rules and determine whether they apply to your business. 

What are the filing obligations?

There are various filings with the CRA that may be required under the GMT rules. It’s important to note that even if there’s no GMT liability in Canada, an in-scope MNE group will have filing obligations (or in some cases, may have to notify the CRA). For the following returns and any notifications, the filing and any taxes owing are generally due June 30, 2026 or 15 months after the particular fiscal year end (whichever is later). For the first year of filing, an MNE group may have an extended filing deadline of 18 months after the fiscal year-end, where certain conditions are met. Note that the CRA hasn’t yet made any of the returns available.

GloBE information return

The GloBE information return (GIR) discloses certain information on the MNE group (e.g., identification of constituent entities, overall corporate structure, GloBE calculations, elections made or revoked, appointment of any designated filing entity, and safe harbours) in accordance with the OECD's standardized return.

Generally, if the MNE group has a designated filing entity located in Canada, that entity must file the GIR with the CRA. Otherwise, the ultimate parent entity of the MNE group (or the intermediate parent in certain cases) must file the GIR, if it’s located in Canada. If the ultimate parent entity or designated filing entity isn’t located in Canada and the GIR is not filed by a qualifying foreign filing entity, then generally each entity in the MNE group located in Canada must file the GIR. If there’s more than one such entity, the group can choose a designate to file the return.

A qualifying foreign filing entity of an MNE group is the ultimate parent entity or designated filing entity located outside of Canada that is obligated to file the GIR in their respective filing jurisdiction. That filing jurisdiction must have a qualifying competent authority agreement with Canada which provides for the automatic exchange of these returns.

GIR notification requirement

If a qualifying foreign filing entity files the GIR, each entity of the MNE group that’s located in Canada must notify the CRA of the identity and jurisdiction of the qualifying foreign filing entity. If more than one entity in Canada is required to make this notification, a designated notification entity may be appointed. 

QDMTT, IIR or UTPR return

The separate returns for QDMTT or IIR are only required to be filed in Canada if top-up taxes apply in Canada, under the respective rules.

Generally, any entity that’s required to pay the top-up tax under QDMTT and IIR must file these returns. Similar to the GIR, where more than one entity is required to file a QDMTT or IIR return, the group can designate one such entity to file the respective return, provided they’re resident in Canada.  

Similarly, if there’s a top up tax liability in Canada under the proposed UTPR, a separate UTPR return will be required (if enacted). 

What are the non-compliance penalties?

An MNE group that fails to comply with Canada’s GMT rules could be subject to significant penalties. Transitional penalty relief may be available in certain circumstances. 

Each failure to file a GIR by the due date may result in a penalty of $25,000 per month for each complete month the return is late, up to a maximum of 40 months (i.e., $1,000,000). This penalty can also be applied where the GIR is insufficiently completed or for failure to notify the CRA of a foreign GIR filing. Each entity in the MNE group that’s located in Canada is jointly and severally liable for any penalties.

A late-filed IIR or QDMTT return may result in a penalty of 5% of the unpaid tax plus 1% of that unpaid tax multiplied by the number of complete months (up to 12) that the return remains outstanding (with a maximum penalty of 17% of the unpaid balance).

Additional penalties may apply for repeated failure to file, false omissions, or failing to comply after receiving a notice. While the range of penalties are broad, it should be noted that certain sections of the GMT Act may result in personal fines and possible imprisonment for various offences, including failure to file, keep records, pay and even comply with rules in the GMT Act. 

The CRA may also apply the general anti-avoidance rule (GAAR) and the new GAAR penalty to “abusive” transactions undertaken to avoid global minimum tax. 

How can your business prepare?

To comply with the GMT rules, an MNE group is required to make certain calculations for every country in which it operates. This means impacted MNE groups must familiarize themselves with the complex rules, as well as foreign tax rules (since many other jurisdictions have adopted Pillar Two), and coordinate across multiple countries to determine where top-up taxes are required. 

Of note, given that the QDMTT is imposed in the local jurisdiction, and takes precedence over the IIR that’ is otherwise applicable to a parent entity, the GMT rules may result in a Canadian tax liability of Canadian-based entities in MNE groups. It’s foreseeable that foreign head-offices may delegate the task of gathering information and determining potential Canadian tax liabilities and filing obligations, under the GMT rules. Therefore, we advise that tax groups responsible for Canadian-based entities of qualifying MNE groups become familiar with these GMT rules. 

The calculations necessary to comply with the GMT rules (and other similar rules imposed by other jurisdictions) have significant data requirements. As such, MNEs (including persons responsible for Canadian entities within foreign-based MNEs) will need to evaluate their current data, systems, and processes and address any gaps to ensure compliance with the rules. It’s also important to determine if your business is eligible for any safe harbour rules. 

MNE groups should also stay updated on the latest developments, as OECD guidance is expected to remain ongoing and will inevitably lead to regular updates and amendments to the GMT Act. 

For help determining the impact of these rules on your business, contact your local advisor or reach out to us here.

Disclaimer

^{The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.}