How Canada’s Budget Law Affects Canada-US Tax Comparisons

This third piece of a series comparing Canada and US individual and business tax rules analyzes how Canada’s Nov.4 federal budget provisions affect the comparisons of Canada’s tax rules to their US counterparts. Draft legislation (Bill C-15 issued on Nov. 18 ) reflects some of the budget proposals and the balance will be dealt with in subsequent legislation, and tax changes are generally prospective not retroactive.

In prior commentaries, I noted that comparing Canadian and American tax laws can be informative, instructive, and interesting, and provided examples of how they are similar and diferent in many areas. Nathan Boidman, How Does OBBBA Affect Canada-US Business Tax Comparisons?, Tax Mgmt. Int’l J. (Oct.30, 2025); Nathan Boidman, How Does OBBBA Affect Canada-US Individual and Personal Tax Comparisons, Tax Mgmt. Int’l J. (Nov. 12, 2025). Those commentaries dealt with how the enactment of the One Big, Beautiful Bill Act affected the comparison of aspects of the US Code’s corporate and business tax provisions amended to their counterparts in Canada. This article examines how Canada’s budget affects the comparisons between the two countries.

Both countries tax worldwide income of domestic taxpayers. Canada taxes “residents,” with that notion applied directly to individuals and corporations, and the US taxes citizens, certain alien individuals, and domestic corporations. Additionally, Canada taxes foreign corporations that have their central mind and management in Canada on worldwide income, but the US only taxes a foreign corporation on income effectively connected to a US trade or business, regardless from where it is managed. And the US taxes citizens regardless of their residence, but Canada does not.

Corporate Tax Rates

US. In the US, a corporation pays income tax on its profits to the federal government and to 44 states. State income taxes average about 5%,with highs of more than10% (including a few city corporate profits tax) and are deductible in computing the taxable income for the federal 21% corporate tax.

That results in an overall income tax rate of 21% in states that levy no state income tax (e.g., Ohio and Texas) and an overall rate of above 30% in the highest taxing states (e.g., California and Pennsylvania).

Canada. In Canada, the average corporate income tax rate is somewhere halfway between the two US extremes of 21% and more than 30%. This comes about from a framework that is quite different from the US system.

Leaving aside special low income tax rates for portions of profit for locally-owned Canadian corporations, a corporation that earns profit through a fixed place of business (e.g.,"permanent establishment”) in one or more of Canada’s10provinces (or certain far-north areas) pays tax on its pre-tax taxable income at a rate that combines 15% for the federal government and between 8% and 16% for the provinces. That calculates to an income tax rate of between 23% and 31%, with the combined rate in Canada’s two largest provinces (Ontario and Quebec) being around 26.5%.

Budget. Notwithstanding pre-budget rumors to the contrary, the budget makes no changes to the federal aspects of the foregoing.

Canada does not have a counterpart to the US 15% corporate alternative minimum tax applicable to groups with US$1 billion of book income but does, of course, have the Pillar Two related rules referred to below.

Tax Base and Write-Offs

Both countries depart from Generally Accepted Accounting Principles in determining the amount of taxable income a taxpayer has earned and separately provide (aside from asset cost deprecation and write-offs) for certain credits (some refundable) against tax otherwise payable by reference to certain types of investments or expenditures (including those for scientific research and development).

The budget mimics post-2017 changes in the US starting with the Tax Cuts & Jobs Act’s temporary adoption of immediate expensing of capital manufacturing expenditures that was made permanent by the OBBBA and now includes domestic research and development expenditures. The budget provides 100% write-offs of buildings used for manufacturing and acquired before 2030, 75% for those acquired in 2030, and 31% and 55% for those acquired in 2032 and 2033.

The budget enhances some of the credits and related “flow-through” share mechanisms under and for the Critical Mineral Exploration Tax Credit (including sensitive rare earth minerals), the Clean Technology Manufacturing Investment Tax Credit, Carbon Capture, Utilization,and Storage Investment Tax Credit, and Clean Technology Investment Tax Credit.

These write-off rules and credits lower immediate cash tax liabilities. But questions remain about whether they also lower effective tax rates (where book income is compared to book taxes) below 15%.

In Canada, there is a question of whether that could trigger top-up tax under the domestic minimum tax rules of the Global Minimum Tax Act (discussed below) for Canadian groups that have at least €750 million of gross revenue.

In the US, there is a question of whether this triggers top-up tax under CAMT referred to above.

International Issues

1. Transfer Pricing
The budget completes the adoption of OECD-inspired transfer pricing rules that harbor deep anti-structuring features and the specter of taxpayer arrangements being rewritten by government.

Canada added to the rules in §247 of the Canada Income Tax Act the notions of “actual conditions,” “arms-length conditions,” “economically relevant characteristics” (which had nine parts ), as well as making the OECD Transfer Pricing Guidelines part of Canadian law. The guts of the new rules, incorporating the above notions, are found in the following sections of the revised act:

• §247(2), titled “Transfer price adjustment";
• §247(2.01), titled “Transfer pricing adjustment—deeming rule";
• §247(2.02), titled “Transfer pricing adjustment";
• §247(2.03), titled “Transfer Pricing Guidelines";
• §247(2.04), titled “Most appropriate method”.

The proposals seem to complete a transition from the question raised by the law prior to amendment in 1998: “Is the price right?” From1998 to the present phase that mainly continued the first phase, but tempered by the 1998 addition of §247(2)(b) and (d) that could challenge the propriety of a transaction (although never successfully invoked). Now there is the new go forward phase that instead of focusing on whether the “price is right” will focus on the question of whether the “transaction is right”.

This approach undoubtedly will be fraught with uncertainty. A Bloomberg Tax article reported that “Canadian tax professionals see a future with more tax disputes and probably higher tax bills under rules the government proposed this week strengthening its powers to decide if a company’s affiliate transaction pricing is out of line.” James Munson, Canada Sets Up Big Changes for Company Affiliate Pricing Rules, Daily Tax Rep. (Nov. 7, 2025). He went on to note, “Uncertainty over how the new provisions would work and their inevitable conflict with jurisprudence centered on the legal form of intercompany transactions mean transfer pricing disputes will rise in Canada in the coming years, practitioners said.”

The proposals clearly set Canada apart from the US, which continues to mainly focus on getting the price right, although recent US cases do raise other issues. The US seems not to have been overrun by the pervasive new OECD-led orthodoxy, though the US economic substance doctrine is always a threat to intercompany arrangements. 

2. Foreign Subsidiary Income Attribution
A fairly narrow change in the budget respecting Canada’s controlled foreign affiliate passive income attribution rules (i.e.,foreign accrual property income rules) akin to the US CFC passive income attribution rules (subpart F) is occasion to briefly visit this area and the wider attribution area ushered in by the TCJA adoption of active business income attribution through the Global Intangible Low-Taxed Income rules followed in Canada by the 2024 enactment of the OECD-sponsored, Pillar Two-based Global Minimum Tax Act.

The US adopted subpart F in 1962, and Canada adopted Foreign Accrual Property Income in 1972. Although FAPI aimed primarily at purely passive income of Controlled Foreign Affiliates, the law also attributed certain Canadian CFC-related active income, such as income of a CFA derived from captive insurance arrangements respecting Canadian risks.

It is the latter which is tightened up by the budget—just another round in the ongoing battle between government and taxpayers in this area.

Turning to the wider area, the TCJA broke with the long-established internationally-accepted practice of not taxing a multinational parent on undistributed active business profits of a foreign subsidiary by introducing GILTI.

That development and the subsequent OECD-led development of PillarTwo—and its global minimum 15% tax mandate and its adoption by Canada in 2024 by way of the Global Minimum Tax Act—was fully covered in Nathan Boidman, How Does OBBBA Affect Canada-US Business Tax Comparisons?, Tax Mgmt. Int’l J. (Oct. 30, 2025).

Nothing in the budget changes the GMTA and it remains unclear if and when the controversial “Under Taxed Profits Rule"—which could unleash further conflict between the two countries—will be added to the GMTA.

Finally, not unrelated is that the budget reaffirmed that Canada’s controversial Digital Services Tax legislation will be repealed by Parliament.

Individual and Personal Tax Matters

The budget makes no changes in this area that raise a discussion of a comparative nature.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Nathan Boidman, retired Canadian attorney and CPA, specialized in Canada-US taxation and is now founding a non-profit Canada-US taxation center.

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