Preparing for the tidal wave of Canadian tax changes

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Which companies will succeed under the new tax rules?

The federal government has introduced legislation that makes several significant tax policy proposals a reality. These include new interest limitation measures and recently enacted mandatory disclosure rules. They also significantly change Canada’s general anti-avoidance rule (GAAR) and set the stage for updates to existing transfer pricing rules. The alternative minimum tax (AMT) is also expected to change, although these updates were not included in the legislative measures released on November 28, 2023. Collectively, these changes affect virtually every company doing business in Canada, including subsidiaries of foreign-headquartered companies, and many high net worth individuals and families.

We expect many of these policy changes to be effective in 2024 for calendar-year taxpayers.

They’ll create new complexities and greater uncertainty for taxpayers, with ramifications that extend beyond the tax function and permeate other parts of the business, including corporate development. For example, the interest limitation measures may lead to higher after-tax borrowing costs for some organizations and affect the economics of mergers and acquisitions (M&A). Elsewhere, the new mandatory disclosure rules and the GAAR amendments can also increase the risks of implementing certain transactions, including large penalties of up to 25% of the tax benefit. And additional disclosure requirements may lead to more disputes with tax authorities.

In addition to new legislation, Canada Revenue Agency administrative positions have also changed. This will mean increased complexity in calculating tax attributes relevant for distributing funds among Canadian groups.

The end result? Collectively, companies will pay more in taxes. Many will also end up spending more on compliance, especially if they fall back on traditional approaches of reacting to tax changes. But other companies will find ways to succeed in this new landscape. The organizations that are first to understand and integrate the impact of these changes across their business—including financial planning, deal economics and growth strategies—and use technology to power their compliance activities can free up tax talent to work with the business on strategic issues.

In this article, we’ll explore what these tax changes mean for Canadian companies, as well as how organizations can succeed in this new business environment.

EIFEL, AMT, GAAR and other tax changes: What are the implications?

The sheer volume and magnitude of these new policies—which also include the OECD’s Pillar Two and environmental tax incentives—in such a short period of time amounts to a tidal wave of tax changes crashing down on Canadian companies.

Many organizations may initially expect to fall outside the scope of these new and amended legislative measures. But companies that have reviewed the rules in detail are starting to understand that these measures may affect their business in significant ways. For example, the inability to deduct hedging costs on debts, including currency, interest rate and payment risk, or any amount that’s economically equivalent to interest as part of interest and financing expenses may increase taxable income. Separately, an indemnity clause in a transaction can trigger a reporting requirement that must be met within 90 days—potentially increasing post-deal closing costs and causing disputes over reporting obligations.

Many companies are also realizing they have little time to prepare. These measures require complex calculations, sometimes based on data not currently collected by the tax function. At the same time, the government has so far released limited guidance on interpreting these changes, magnifying the uncertainty facing companies.

  • Excessive interest and financing expense rules (EIFEL): New interest limitation rules, based on a complex set of calculations, can affect the cost of capital for companies.
  • Alternative minimum tax (AMT): Changes will affect a taxpayer’s ability to benefit from some donation credits, stock option deductions and other items.
  • General anti-avoidance rule (GAAR): Significant adjustments, backed by large penalties, will alter tax planning dynamics when structuring transactions and introduce new tax accounting considerations and disclosure requirements. 
  • Mandatory disclosure rules: Companies and their advisors must now file specific disclosures with tax authorities within 90 days from the implementation date of specific reportable and notifiable transactions. Many large businesses must also report particular uncertain tax treatments annually.
  • Transfer pricing rules: Consultations on reforming and modernizing these rules looked at reducing the focus on individual transactions and giving greater consideration to broader economic factors in deals between related parties.
  • Pillar Two: The global minimum tax regime contains large and complex data requirements, as well as a financial reporting deadline that could come as early as the first quarter of 2024.
  • Environmental tax incentives: Companies applying for these green credits need to meet stringent requirements, including attesting to prevailing wage and other workforce information not typically collected by the tax function.

How companies can adapt with confidence

With limited time to act, companies should analyze and model how the new legislation will increase their tax liability and whether additional disclosures will be required. Working through these steps is also a powerful opportunity to identify potential business changes that can help you thrive in this new environment.

Here are some initiatives that can help:

  • Run a gap analysis. It’s helpful to start by establishing which tax changes affect your organization the most and then consider your ability to meet the requirements. It’s important to go beyond a cursory examination and consider the details. For example, EIFEL rules include a pre-regime election to carry forward excess capacity generated in the three years before the EIFEL rules take effect. Organizations should evaluate if this and other elections apply to them, understand their current position and decide whether the pre-regime election and other elections may benefit them. Companies may find they need to undertake more planning and take additional actions, such as developing a loss consolidation strategy.
  • Pinpoint new reporting requirements. On top of the soon-to-be enacted legislation, companies need to consider recently enacted rules. Several of these tax measures include increased disclosure requirements. In some cases, both taxpayers and their advisors must file specific disclosures with the government within 90 days of a transaction. Additionally, companies need to evaluate whether their approach to these new tax measures will trigger any new financial reporting obligations.
  • Determine additional data demands. Complying with these new tax measures requires additional sources of data. For example, calculating your Pillar Two top-up tax involves accessing legal information such as dividend payments and share issuances. Elsewhere, organizations applying for new environmental tax credits must collect human resources information, such as wage data and apprenticeship numbers. Companies will need to collaborate with different parts of the business in new ways and establish tech-enabled data collection processes to gather the necessary information. Making these workforce and technology investments can help your organization build resilience and improve its ability to navigate a rapidly evolving regulatory environment.
  • Model the impact on your transactions. After collecting the required data, companies can start calculating how these measures affect their company and then develop appropriate plans, such as adjusting tax provisions. It’s particularly important to model the impact of these changes on M&A deals. For example, EIFEL may reduce the amount of interest and lease financing amounts deductible for tax purposes. This can dramatically alter the economics of a transaction if a company finances an acquisition with borrowed money. These new tax measures can also challenge traditional assumptions used to calculate the rate of return from the acquisition of a target company. The acquisition may also have a significantly different tax profile as part of your combined post-transaction organization than it does today. For example, it could push some companies beyond €750 million in annual revenue—the threshold for Pillar Two that, when crossed, could change the company’s after-tax profits post-transaction.

Turning tax into a strategic differentiator

This tidal wave of policy changes is an opportunity for many companies to reimagine the strategic role of tax in financial planning, deal activity and governance, and how they can unlock additional value from their reporting obligations. Organizations that include tax in their business strategy can better manage policy changes that affect company valuations, financial planning and the return on investment in a transaction.

Additionally, companies that transparently communicate to stakeholders their total tax contribution globally can strengthen their social licence to operate and better manage any reputational risks arising from disputes with tax authorities. This can create tangible business value, particularly as investors examine companies more thoroughly for possible tax risks.

A technology-powered approach to accelerating strategic outcomes

Rethinking how you use technology to gather and analyze the necessary data can help you effectively manage the risks associated with the greater scrutiny from tax authorities stemming from the growing number of disclosure requirements. For example, companies can design their transaction processes to account for the new disclosure requirements with an eye to making data easier to access in the event of potential disputes in the future. Such digital reporting solutions, combined with strong data governance, controls and processes, can help organizations reduce the time it takes to resolve disputes with tax authorities.

Working with the right partner to streamline and automate these processes can be a powerful way to gain access to both new technologies and top talent.

At PwC Canada, we’ve developed what we call the next generation of managed services, including tax-specific offerings. These go beyond traditional outsourcing arrangements by focusing on helping organizations accelerate their strategic outcomes. Our teams combine tax and data expertise, augmented by digital solutions, to act as an extension of your in-house tax department—helping you extract data-driven insights that improve decision making.

A community of solvers building trust and delivering sustained outcomes

It’s crucial to act now. Tax, finance and corporate development leaders must work together to quickly grasp the implications of these changes and develop a plan to understand the business impacts and meet the imminent data and disclosure requirements. 

By taking immediate action, these leaders and their teams can build trust both within and outside their organization and help position their company for sustained growth.

At PwC Canada, our team of tax and accounting professionals take a human-led and tech-powered approach to helping organizations transform their approach to tax reporting obligations. We can help you assess the impact of these different policy changes, including understanding your exposures, by performing a gap analysis and tax modelling. We can also help you collect the necessary data, prepare the required disclosures and understand the impact on M&A transactions. Contact us to learn more.

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Colin Mowatt

Colin Mowatt

Partner, Tax Policy Leader, PwC Canada

Tel: +1 416 723 0321

Kara Ann Selby

Kara Ann Selby

Risk and Regulatory Platform Leader, Partner, International Tax, PwC Canada