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2024 Federal Budget – International tax measures


As anticipated, the 2024 Federal Budget did not introduce any major new measures related to international taxation. However, two measures related to reporting were introduced, as well as notable measures that are set to be introduced and implemented, which were previously announced in past budgets and economic updates.

Interest Deductibility  

On November 3, 2022, the government released its latest version of draft legislation relating to Excessive Interest and Financing Expenses Limitation (EIFEL) which will affect multinational corporations, cross-border investments and other Canadian public and private enterprises. As currently proposed, the EIFEL rules will limit the deductibility of net interest expense to a fixed ratio, ultimately to be 30% of taxable income before interest, taxes, depreciation, and amortization (referred to as tax EBITDA). This legislation was included as part of Bill C-59 which received its second reading on March 18, 2024. It is expected this legislation will receive royal assent later this year. 

The EIFEL rules provide an exemption for interest and financing expenses incurred in respect of arm’s length financing for certain public-private partnership infrastructure projects.  Budget 2024 proposes expanding this exemption to also include an elective exemption for certain interest and financing expenses incurred before January 1, 2036, in respect of arm’s length financing used to build or acquire eligible purpose-built rental housing in Canada.   

These rules are currently set to apply for taxation years beginning on or after October 1, 2022. For more details on how the EIFEL rules will impact your organization, read our Tax Alert:

The next round of interest deductibility and its impact on stakeholders

The Department of Finance has released the next round of proposed changes to the Excessive Interest and Financing Expenses (EIFEL). Find out details of the key changes and what it means for stakeholders.

Read more

Proposed Crypto-Asset Reporting Framework

With the rise of crypto assets in the financial world, the Organization for Economic Cooperation and Development (OECD) has developed a new framework (referred to as the Crypto-Asset Reporting Framework, or CARF) that provides for the automatic exchange of tax information in relation to transactions in crypto assets.  

Budget 2024 proposes to implement the CARF in Canada. This measure would impose a new annual reporting requirement in the Income Tax Act on entities and individuals (referred to as crypto-asset service providers) that are resident in Canada, or that carry on business in Canada, and that provide business services that facilitate exchange transactions in crypto assets. Crypto-asset service providers would be required to annually report detailed information regarding crypto asset transactions to the Canada Revenue Agency.

Simplification of regulation 105 waivers

Existing income tax rules require a person who pays a non-resident for services provided in Canada to withhold 15 per cent of the payment and remit it to the Canada Revenue Agency (CRA). This acts as a pre-payment of any Canadian tax that the non-resident may ultimately owe. However, many non-resident service providers do not ultimately owe Canadian tax because they do not have a permanent establishment in Canada under an applicable tax treaty.  

These non-resident service providers may apply to the CRA for an advance waiver of the withholding requirement for a specific planned transaction. Alternatively, they may apply for a refund of the withheld amounts. 

However, many non-resident service providers instead pass the cost of the withholding requirement on to the payors, and this increases costs for Canadians. This budget proposes to provide the CRA with the legislative authority to waive the withholding requirement, over a specified period, for payments to a non-resident service provider if either of the following conditions are met:  

  • the non-resident would not be subject to Canadian income tax in respect of the payments because of a tax treaty between its country of residence and Canada; or 
  • the income from providing the services is exempt income from international shipping or from operating an aircraft in international traffic.  

This measure would come into force on royal assent of the enacting legislation.

Pillar One and Pillar Two

Consistent with previous budgets, the government reaffirmed its commitment as part of the Organisation for Economic Co-operation and Development (OECD) initiative on Base Erosion and Profit Shifting (BEPS), Canada has joined a two-pillar plan (known as Pillar One and Pillar Two) along with 138 member countries on international tax reform.

Pillar One will ensure that large multinational corporations will reallocate taxing rights of profits to jurisdictions where their users and customers base are located. Budget 2024 confirmed that the government is still actively working with its international partners to develop the multilateral convention. To safeguard Canadians' interests, draft legislation for a 3% Digital Services Tax (DST) was most recently released in August 2023. DST applies to digital services revenues earned from customers located in Canada of multinational corporation with annual revenues over €750 million and in-scope revenue over $20 million.  The implementing legislation for this tax is before Parliament in Bill C-59, and the tax would begin to apply for calendar year 2024, with that first year covering taxable revenues earned since January 1, 2022. 

Pillar Two ensures that multinational corporations with annual revenues over €750 million pay a minimum effective tax rate of 15% globally. The 'Global Minimum Tax Act' (GMTA) draft legislation was released in August 2023, followed by a consultation period. Revised legislation is anticipated in 2024. 

Budget 2024 reaffirms Canada’s intention, announced in Budget 2022, to implementing the Pillar Two global minimum tax. The primary charging rule of Pillar Two and a domestic minimum top-up tax will take effect for fiscal years starting on or after December 31, 2023. The secondary charging rule, the undertaxed profits rules, will be effective for fiscal years beginning on or after December 31, 2024. The government will keep monitoring international progress as it advances with Pillar Two's implementation.

Hybrid mismatch

Hybrid arrangements can be used to exploit tax differences between Canadian and foreign tax laws. Budget 2021 proposed to eliminate the tax benefits from hybrid mismatch arrangements. In April 2022, the Federal Department of Finance unveiled draft legislative proposals related to hybrid mismatch arrangements. The proposals represent the first of two legislative packages aimed at incorporating the OECD's BEPS Action Plan recommendations into Canada's Income Tax Act. This initial package addresses "deduction/non-inclusion" mismatches associated with hybrid financial instruments. Typically, these mismatches occur when a payment for a financial instrument is deductible for the payer but not included in the recipient's ordinary income. 

The second package, which will cover the remaining recommendations relevant to Canada, will be released later for stakeholder feedback and will not be applicable before 2023. No changes to these proposals were announced in the Budget.

Transfer pricing

The 2024 Budget reaffirms the government’s pledge to modernize existing transfer pricing regulations. Originally announced in the 2021 Budget, the Department of Finance expressed interest in a public discussion regarding Canada's transfer pricing rules. Stakeholders were invited to submit their feedback in July 2023, following the release of a consultation paper with draft legislation in June 2023. These proposed changes are designed to clarify the application of the arm's-length principle and ensure Canada's transfer pricing rules are in line with evolving international standards and the OECD's transfer pricing guidance. No changes to these proposals were announced in the Budget.

The information in this publication is current as of April 16, 2024

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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