Canada: Draft second budget bill containing remaining tax measures from 2025 budget, including Pillar Two changes

Canada released a second budget bill containing the remaining tax measures proposed in the 2025 federal budget, among other measures.

The proposed legislation (Bill C-31) includes tax measures related to:

• Immediate expensing for manufacturing and processing (M&P) buildings
• Tax deferral through tiered corporate structures rules (“dividend suspension rules”)
• Avoidance of tax debts
• Clean economy incentives
• 21-year anti-avoidance rule for indirect transfers to trusts
• Global minimum tax
  • The measures were previously included in the August 12, 2024, draft legislation and the August 15, 2025, draft legislation and include:
    • New framework for undertaxed profits rule (UTPR) applicable to fiscal years of a qualifying multinational enterprise (MNE) group that begin on or after December 31, 2025
    • New transitional “side-by-side” safe harbor and related election applicable to fiscal years of a qualifying MNE group that begin on or after January 1, 2026
    • De-consolidation rule for certain qualifying MNE groups that include one or more private investment entities (defined as a private entity that owns a controlling interest in a publicly listed Canadian corporation), effective for fiscal years of a qualifying MNE group that begin on or after December 31, 2023
    • Updated rules for allocating covered taxes in respect of certain entities (e.g., tax transparent entities), effective for fiscal years of a qualifying MNE group that begin on or after December 31, 2023
    • New provisions for deferred tax assets and liabilities, including pre-global anti-base erosion (GloBE) arrangement deferred tax assets, effective for fiscal years of a qualifying MNE group that begin on or after December 31, 2023
    • Transitional rules for constituent entities’ pre-GloBE transactions in fiscal years before their GloBE transition year, effective for fiscal years of a qualifying MNE group that begin on or after December 31, 2023
  • The proposed legislation also includes changes to the Income Tax Act regarding foreign accrual tax (FAT), foreign tax credits, and foreign affiliate (FA) surplus accounts regarding domestic minimum top-up tax (DMTT) regimes in foreign jurisdictions.
• Cryptoasset reporting framework (CARF)

The business income tax measures are considered substantively enacted for IFRS and Accounting Standards for Private Enterprise (ASPE) purposes as of May 6, 2026, the date the bill received first reading, as Canada has a majority government. The measures will be considered enacted for U.S. GAAP on the date the proposals receive Royal Assent.

Read a May 2026 report prepared by the KPMG member firm in Canada