Compliance

Staying Compliant in 2026: Understanding Transfer Pricing, Pillar Two & Other Corporate Tax Changes

Large Canadian companies face a wave of compliance changes—new transfer pricing rules, Pillar Two, and revised documentation obligations. Navigate them before year-end or risk penalties.

By NomadicTax Research Team • 5-8 min read • June 7, 2026

## Overview of Recent Corporate Compliance Shifts With the enactment of **Bill C-15** and **Bill C-31**, Canada introduced substantial changes to corporate taxation frameworks, affecting transfer pricing rules, foreign affiliate income (FAPI/FABI), and the global minimum tax regime (**Pillar Two**). These changes are effective for tax years beginning **after November 4, 2025**, so many corporations must prepare now. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/04/tnf-canada-2025-budget-tax-measures-including-new-transfer-pricing-rules-and-repeal-of-dst-enacted.html?utm_source=openai)) ## Major Compliance Changes to Know ### Transfer Pricing & Documentation Rules - Taxpayers must analyze cross-border transactions between **non-arm’s-length persons** using not only contractual terms but also **economically relevant characteristics**. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/04/tnf-canada-2025-budget-tax-measures-including-new-transfer-pricing-rules-and-repeal-of-dst-enacted.html?utm_source=openai)) - Enhanced documentation obligations starting with tax years **after November 4, 2025**. Corporations must track substance over form. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/04/tnf-canada-2025-budget-tax-measures-including-new-transfer-pricing-rules-and-repeal-of-dst-enacted.html?utm_source=openai)) ### Pillar Two / Global Minimum Tax and Dividend Suspension Rules - Canada’s draft second budget bill (Bill C-31) includes implementation of Pillar Two undertaxed profits rules (UTPR), side-by-side safe harbors, and related elections for multinational enterprise (MNE) groups for fiscal years beginning **on or after December 31, 2025**. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/05/tnf-canada-draft-second-budget-bill-containing-remaining-tax-measures-from-2025-budget-including-pillar-two-changes.html?utm_source=openai)) - Dividend suspension measures are introduced to prevent tax deferral in tiers of corporate structures. Dividends must now align with certain thresholds or suffer restrictions. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/05/tnf-canada-draft-second-budget-bill-containing-remaining-tax-measures-from-2025-budget-including-pillar-two-changes.html?utm_source=openai)) ### Foreign Affiliate Income: FAPI & FABI Rules - New anti-deferral rules under **FAPI** have been enhanced; **Foreign Accrual Business Income (FABI)** is being introduced as an elective regime which applies to certain foreign affiliate income. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/04/tnf-canada-2025-budget-tax-measures-including-new-transfer-pricing-rules-and-repeal-of-dst-enacted.html?utm_source=openai)) - For CCPCs and substantive CCPCs earning investment income through foreign affiliates, these changes could lead to increased tax obligations and reporting. ([kpmg.com](https://kpmg.com/us/en/taxnewsflash/news/2026/04/tnf-canada-2025-budget-tax-measures-including-new-transfer-pricing-rules-and-repeal-of-dst-enacted.html?utm_source=openai)) ## Action Steps for Corporations - **Review Fiscal Year Endings**: If your fiscal year begins after November 4, 2025, ensure your policies, contracts, and reports reflect the new rules. - **Transfer Pricing Analysis**: Gather all materials that support economically relevant characteristics—not just contract language. Document functions, risks, assets, pricing, comparables. - **International Structure Audit**: Identify controlled foreign affiliates, assess whether FAPI or FABI rules apply, and understand how Pillar Two safe harbors or de-consolidation rules might affect your group. - **Dividend Strategy**: Re-evaluate dividend policies; avoid retroactive issues by ensuring dividends paid align with what the new rules allow or prepare for withholding or restrictions. - **Compliance Budgeting**: These changes often increase costs (for legal, accounting, systems). Budget for additional compliance, documentation, possibly higher effective taxes. ## Example Scenario **Company A**: A Canadian tech manufacturer controlled by foreign parent; FY ends December 31, 2025 - Previously paid intercompany royalties based solely on contractual license agreements. - Under new rules, must show market-based royalty, risk borne, functions performed. Lack of ‘economic substance’ risk reassessment. - Also, as part of an MNE group, will need to understand how Pillar Two UTPR applies and whether its effective tax rate abroad triggers top-up tax. - If paying dividends to a domestic subsidiary structured through layers, dividend suspension rules may defer refund or impose additional reporting. ## Consequences of Non-Compliance - Penalties for insufficient or missing documentation are steeper under transfer pricing audits. - Under Pillar Two, penalties can arise if group fails to elect safe harbors or incorrectly calculates undertaxed profits. - Dividends not meeting new requirements may lose tax benefits or trigger withholding. ## Takeaway New federal legislation means **corporate compliance** is changing fast. Transfer pricing, Pillar Two, and income deferral rules require proactive planning. Review structures now, improve documentation, and align corporate actions with the effective dates to avoid noncompliance risks.