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)
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)
- Enhanced documentation obligations starting with tax years after November 4, 2025. Corporations must track substance over form. (kpmg.com)
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)
- 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)
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)
- For CCPCs and substantive CCPCs earning investment income through foreign affiliates, these changes could lead to increased tax obligations and reporting. (kpmg.com)
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.