A Snapshot of Tax Changes Impacting U.S. Companies in Canada

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In April 2021, the Canadian government released the 2021 federal budget, including a number of proposed tax changes. Many of these changes impact businesses in the U.S. that have operations in Canada, including with respect to international tax and mandatory disclosure measures. Because Canada and the U.S. often have differing tax rules, it’s important to understand the differences, and similarities, to ensure compliance and safeguard against potential issues.

Below are five significant Canadian tax proposals in this year’s budget that U.S. companies should know about when doing business north of the border:

  1. Starting in 2023, a new “earning stripping” rule that would limit net interest deductions to 30% of the EBITDA (40% in the first year). The new rule will apply to most entities with Canadian income tax exposure and does not replace existing limitation rules.

  2. Eventual elimination of the tax benefits of hybrid mismatch arrangements. In general, these cross-border arrangements take advantage of differences in the income tax treatments of either the business entities or the financial instruments under the laws of two or more countries.

  3. A re-examination of Canada’s transfer pricing regime, with resulting changes to be determined. This is motivated by a recent loss by the Canadian tax authorities in a high-profile transfer pricing case. This would likely support intensified enforcement of Canada’s transfer pricing rules.

  4. Starting in 2022, a new 3% tax on digitally related services. This will impact social media, online advertising and user data. The tax will apply only to large businesses that have at least €750-million of global consolidated revenue and C$20-million of relevant Canadian revenue, and is proposed to be an interim measure pending wider international tax reform.

  5. Starting in 2022, the tightening of current reportable-transaction rules and the introduction of new reporting requirements for “notifiable transactions” (similar in concept to U.S. “listed transactions”) and uncertain tax positions. Taxpayers may be subject to monetary penalties and extended limitations periods where required reporting is not done.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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