On July 23, 2026, the Department of Finance released a consultation on a broad package of draft legislation to implement various tax measures, update certain previously released draft legislation and make certain technical changes. The Department of Finance subsequently also released a separate package of technical amendments, including noteworthy changes to the definition of taxable Canadian property (TCP).

While the proposals remain subject to change prior to enactment, taxpayers that may be affected should consider their implications now, as several measures are proposed to apply retroactively or in the near term.

The following is a summary of key measures included in the various legislative proposals that are applicable to Canadian businesses:

Transfer Pricing

• Canada overhauled its transfer pricing regime in Bill C-15, Budget 2025 Implementation Act, No. 1, which received Royal Assent on March 26, 2026. Bill C-15 contemplated that simplified documentation requirements could be prescribed by regulation. The July 2026 proposals include the first details and draft regulations for the simplified documentation requirements.
• Under Canadian transfer pricing rules, the Canada Revenue Agency (CRA) may impose penalties where a transaction between taxpayers and certain non-arm’s length entities are not conducted on arm’s-length terms. To access relief from such penalties, taxpayers are generally required to prepare and maintain contemporaneous documentation demonstrating that ‘reasonable efforts’ were made to establish and use arm’s-length terms and conditions for the relevant transactions.
• The proposed simplified documentation regime is designed to alleviate compliance burdens (i.e., reduce the contemporaneous documentation burden) and provide transfer pricing penalty protection for certain qualifying transactions. Under the July 2026 proposals, simplified documentation may be available in four prescribed circumstances:

1. Small Taxpayers and Partnerships - The following conditions must be met by a taxpayer or partnership:
   1. Gross revenue of the taxpayer or partnership (including any other member of the multinational enterprise group that is resident in Canada) does not exceed $25 million during the prior taxation year or fiscal period;
   2. The taxpayer or partnership did not dispose of an intangible property during the taxation year to a non-resident person with whom the taxpayer or partnership, or a member of the partnership, does not deal at arm's length; and
   3. The taxpayer or partnership did not pay or credit to, or receive from, a non-resident person with whom the taxpayer or partnership, or a member of the partnership, does not deal at arm's length, a royalty payment during the taxation year or fiscal period.
2. Tangible Property – Sales or Purchases - The aggregate amount paid or payable (or received or receivable) in respect of purchases or sales of tangible property by a taxpayer or partnership during the taxation year or fiscal period does not exceed $5 million.
3. Intra-Group Services - The aggregate amount paid or payable (or received or receivable) in respect of intercompany services by a taxpayer or partnership during the taxation year or fiscal period does not exceed $2 million.
4. Loans - The aggregate amount paid or payable (or received or receivable) in respect of interest on intercompany loans/borrowings made to or from a related non-resident person during the taxation year or fiscal period does not exceed $1 million.

• Additionally, under all four prescribed circumstances, the taxpayer or partnership must file the prescribed election form on or before the ‘documentation-due date’ for the taxation year or fiscal period and prepare certain documentation of having met the criteria for the relief that must be produced within 30 days of a demand by the Minister.
• The proposals contain an anti-avoidance rule that denies contemporaneous documentation relief where it is reasonable to conclude one of the purposes of a transaction or series of transactions is to benefit from the relief (the accompanying technical notes, for instance, suggest this rule may apply where a taxpayer fragments or staggers transactions to get within the monetary limits in the foregoing rules).
• These transfer pricing measures are proposed to apply to taxation years and fiscal periods that begin on or after January 1, 2026.

Hybrid Mismatch Rules

• Canada’s hybrid mismatch rules implementing the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action 2 Report recommendations were introduced in two major legislative packages: (i) the first package primarily targeting hybrid instruments was released in 2022 and received Royal Assent on June 20, 2024, and (ii) the second package primarily targeting hybrid entities was released in January 2026.
• The July 2026 proposals provide technical adjustments to the draft legislation and accompanying explanatory notes released in January 2026. The following summarizes the key changes to the draft legislation and explanatory notes:

• Thin Capitalization

  • There were technical amendments to both the thin capitalization rules under subsection 18(4) of the Income Tax Act (Canada) (ITA) and hybrid mismatch rules under section 18.4 of the ITA, to ensure the thin capitalization rules apply in priority to the hybrid mismatch rules on payments on or after July 23, 2026.
  • The amendment was introduced to ensure that interest denied under the thin capitalization rules continues to be treated as a deemed dividend for Canadian withholding tax purposes, rather than being denied first under the hybrid mismatch rules and thereby potentially bypassing the withholding tax consequences associated with the thin capitalization regime.

• Deemed Dividend Rule

  • Subsection 214(18) was enacted as part of Canada's 2022 hybrid mismatch regime and generally recharacterizes certain interest payments to non-residents as dividends for Part XIII withholding tax purposes where a deduction for the interest is denied under subsection 18.4(4). The January 2026 hybrid mismatch proposals significantly broadened the rule by extending the deemed dividend treatment to the new categories of hybrid mismatches and to amounts included in income under subsection 12.7(4).
  • However, the July 2026 proposals narrow the scope of subsection 214(18) by removing the extension of the deemed dividend rule to income inclusions under subsection 12.7(4) and by excluding the new categories of hybrid mismatches introduced in the January 2026 proposals. Consequently, the deemed dividend rule generally remains limited to interest denied under subsection 18.4(4) pursuant to the original hybrid mismatch regime enacted in 2022.

• Valuation Rule for Hybrid Payer Mismatches

  • The January 2026 proposals introduced rules concerning double deductions for the same payment due to the involvement of a hybrid payer.
  • Proposed subsection 18.4(7.2) acts as a bridge between the new double deduction mismatch concept and the existing denial rule in subsection 18.4(4). It aggregates the Canadian deductions in respect of a payment and, separately, the foreign deductions, and treats the lesser of the two totals as the "deduction component". This amount then becomes the amount of the double deduction mismatch that can be denied by subsection 18.4(4). The lesser-of test therefore caps the Canadian denial rather than the deduction itself.
  • The newly introduced subsection 18.4(7.3) further ensures consistency by requiring the foreign deduction to be determined using the same valuation basis as the Canadian deduction where differences arise in whole or in part due to a difference in valuation methodologies.
  • Both measures are proposed to apply to payments arising on or after July 1, 2026.

• Reverse Hybrid Arrangement

  • The July 2026 proposals modify the scope of the reverse hybrid arrangement rules by expanding the non-arm's length test to require the payer of a payment, the reverse hybrid that receives it and an entity described in paragraph (c) of the definition of reverse hybrid entity that holds, directly or indirectly, an interest in the reverse hybrid to deal at non-arm’s length with one another if the payment is to be caught as a ‘reverse hybrid arrangement’ (otherwise than a ‘structured arrangement’).

• Ordinary Income Deeming Rules

  • The July 2026 proposals introduce new deeming rules that expand the concept of ‘ordinary income’, which was originally introduced as part of the January 2026 proposals, for purposes of calculating ‘dual inclusion income’.
  • New subsections 18.4(16.1) and (16.2) deem certain payments involving hybrid entities to be ordinary income, while new subsections 18.4(16.3) and (16.4) prevent the same amount from being counted as ordinary income more than once. This is intended to ensure that dual inclusion income is recognized appropriately without creating duplicate income inclusions.

Liquified Natural Gas (LNG) Facilities

• Budget 2025 announced amendments to the ITA to reinstate accelerated capital cost allowance (CCA) rates for low-carbon LNG facilities with respect to eligible LNG equipment and related buildings acquired on or after November 4, 2025 and before 2035 with accelerated CCA rates of 50% for eligible LNG equipment (i.e., Class 47) and 10% for non-residential buildings used in LNG facilities (i.e., Class 1). The 2026 Spring Economic Update provided further details of this measure.
• The July 2026 proposals largely implement the framework previously described in the 2026 Spring Economic Update into enforceable statutory language, with only minor technical revisions.

Carbon Capture, Utilization, and Storage (CCUS)

• As announced in the 2026 Spring Economic Update, the July 2026 proposals would expand the CCUS investment tax credit to include eligible projects that use captured carbon dioxide for enhanced oil recovery (EOR).
• The July 2026 proposals modify the definition of “projected eligible use percentage”, which provides a calculation of the proportion of an expenditure eligible for the CCUS investment tax credit, by adjusting the projected eligible use percentage by including only one-half of the projected ‘eligible EOR use’ in the numerator of the formula. This change would effectively treat half of EOR as an eligible use in determining the credit amount.
• For a project solely dedicated to EOR, this should result in credit rates of 30% for eligible direct air capture equipment, 25% for other eligible capture equipment, and 18.75% for eligible transportation, storage and use equipment for expenditures incurred on or after April 28, 2026 (i.e. the proposed effective date of the EOR measures) and before 2036. For expenditures incurred after 2035 and before 2041, the applicable rates would be 15%, 12.5% and 9.375%, respectively.
• The July 2026 proposals also include a number of technical amendments, including extending the filing deadline for the annual climate risk disclosure report, the construction and completion knowledge-sharing report, and the annual operations knowledge-sharing report to the later of December 31, 2026 (rather than December 31, 2025) and the otherwise applicable filing deadline. This amendment would apply retroactively to January 1, 2022.

Taxable Canadian Property

• The July 2026 proposals broaden the scope of the TCP definition in subsection 248(1) of the ITA. Most notably, the amendments expand the existing look-through rule in paragraph (d) by allowing value to be traced through corporations, partnerships and trusts regardless of whether the intermediary entity itself would be TCP, subject to limited exceptions for certain publicly traded entities and mutual fund corporations or trusts. As a result, shares or interests may be TCP where more than 50% of their value is derived, directly or indirectly, from underlying Canadian real or immovable property, resource property or timber resource property, even where that value is held through multiple tiers of subsidiaries.
• The July 2026 proposals also modify the treatment of partnership interests by distinguishing between listed and unlisted partnership units. Unlisted partnership interests will continue to be tested under paragraph (d), being a more-than-50% value test, while partnership units listed on a designated stock exchange will instead be subject to paragraph (e), which requires both the 25% ownership threshold and the more-than-50% value over the past 60 months test to be satisfied.
• In addition, new subsection 248(1.2) introduces a broader deeming rule for property described in any of paragraphs (a) to (e) of the definition of TCP providing that options, interests and rights in property are themselves treated as TCP. This effectively restores a rule that previously existed in former subsections 115(1) and (3) and may cause options and similar interests to create TCP issues even where the underlying property has not yet been acquired. Consequential amendments repeal subparagraph 248(1)(d)(iv) and paragraph (f) of the TCP definition.
• The amendments come into force on Royal Assent with no transitional or grandfathering provisions. Given the 60-month lookback period embedded in the TCP definition, the amendments may affect existing structures and historic ownership arrangements.