How Does OBBBA Affect Canada-US Business Tax Comparisons?

Comparing Canadian and American tax laws can be informative, instructive, and interesting.

In many areas, the two countries’ tax laws are quite similar. Both countries tax worldwide income of domestic taxpayers (e.g., “residents” as that notion is applied directly to individuals and corporations in Canada and certain alien individuals in the US and by analogous rules in the US to domestic corporations and citizens).

In other areas, the countries’ tax laws are quite different. 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 US citizens regardless of their residence but Canada does not.

The enactment of the One Big, Beautiful Bill Act is occasion to compare the corporate and business aspects of the Code amended or affected by the act to their counterpart in Canada.

Tax Rates and Corporate Structure

In the US, a corporation pays tax on its profits to the federal government and to about 44 states. The states’ income taxes average about 5% (including a few city corporate profits tax) with highs of more than 10% that are deductible in computing the taxable income for the federal 21% corporate tax .

The imposition of federal and state taxes results in a range of an overall tax rate between 21% in states (including Ohio and Texas) that levy no state tax and above 30% in the highest taxing states (e.g., California, Pennsylvania, and New York).

Notwithstanding opposition from Democrats, the OBBBA did not increase the federal 21% tax rate.

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

Leaving aside special low rates for portions of profit of locally owned Canadian corporations, a corporation earning profit through a fixed place of business (e.g., “permanent establishment”) in one or more of Canada’s 10 provinces (or certain far north areas) must pay tax on its pre-tax income at a rate that combines 15% for the federal government and between 8% and 16% for the provinces. That provides for tax rates between 23% and 31%, with the combined rate in Canada’s two largest provinces (Ontario and Quebec) being around 26.5%.

Canada does not have a counterpart to the US 15% corporate alternative minimum tax applicable to groups with $2 billion of book profit. This was not repealed by the act.

The Tax Base

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/write offs) for certain credits against tax otherwise payable by reference to certain types of investments or expenditures (including those for scientific research and development).

Following changes in this area from both the 20I7 Tax Cuts and Jobs Act changes and the Biden administration, OBBBA made permanent several TCJA changes that were otherwise scheduled to expire at the end of 2025.

A major extension is the 2017 100% write-offs of depreciation. That will now include domestic research and experimental expenditures which gives US business a major advantage over Canadian counterparts, which are subject to longer depreciation periods.

International Laws

GILTI and Pillar Two. The 2017 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 the Global Intangible Low Taxed Income tax.

GILTI imposed a tax of 10.5% on the excess of any business income over deductions in respect of certain tangible property (the Qualified Business Asset Income deduction). The rate was arrived at by including .50% of the net relevant income and applying the standard 21% corporate tax rate .

Ironically, this aggressive US initiative broke with tradition and set off an international frenzy involving more than 140 countries (the Inclusive Framework) led by the Organisation for Economic Co-operation and Development. Those countries agreed to a course of action, “Pillar Two,” that now threatens to consume the US.

Under Pillar Two, the countries of the IF commit to enact domestic legislation which imposes a minimum tax of 15% on all profits of a multinational, wherever earned. They also agree to impose that tax on subsidiaries in their jurisdiction of a multinational based in a country that has not enacted the 15% Pillar Two under the so-called “Undertaxed Profit” rule.

The referenced irony is that even though GILTI set off the development of Pillar Two, GILTI, as now enacted, does not meet the requirements of a qualified Pillar Two tax with the unhappy result that foreign subsidiaries of US groups may be subject to tax in those foreign countries on profits they have not earned.

US circles hoped OBBBA would fix the GILTI deficiencies and therefore eliminate the scepter of UTPR applying to US groups.

But that didn’t transpire. OBBBA did increase the effective rate of GILTI from 10.5% to 12.6% (by reducing the 50% deduction to 40%). But that still leaves a US minimum rate that is less than 15%, and more troublesome is that GILTI allows blending of low and high tax Controlled Foreign Corporation countries, whereas Pillar Two rules do not .

The G7 meeting in Canada in late June did see a preliminary agreement to try to reconcile the interests of the US and the IF, which is now under negotiation.

Finally, OBBBA changes the name of GILTI to net CFC tested income, increases the percentages of foreign related tax that is creditable from 80% to 90%, and eliminates the QBAI deduction.

In Canada, the Global Minimum Tax, enacted in June 2024, brings the basic Pillar Two rules into Canada but not (yet) the UTPR, which, if and when enacted, could threaten Canadian subsidiaries of US groups.

The BEAT. The base erosion anti avoidance tax, enacted in 2017, imposes a 10% tax on the excess of outbound deductible intercompany payments over 3% of all deductions.

OBBBA reduces the planned increase of the rate to 10.5% from 12.5%.

Canada has no comparable rule, although there are thin cap and related financing costs limitations.

Inter-CFC Payments. Canada has long had a rule to accommodate foreign tax planning by Canadian-based multinationals. Where a passive item of income (interest or royalty) is received by a CFC (a “controlled foreign affiliate” in Canadian terms) of a Canadian multinational and it is paid to that CFC by another CFC out of its active business profits, §95(2)(a) of the Canadian Income Tax Act recharacterizes the income in the hands of the recipient CFC as active, not passive, so it does not form part of attributable “foreign accrual property income” (the Canadian counterpart of Subpart F income).

The US adopted the equivalent of the Canadian rule (as §954(c)(6)) some years ago, but for limited durations, and has been extending it legislatively on an annual basis.

OBBBA will, finally, make §954(c)(6) permanent—making it fully comparable to its Canadian counterpart.

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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