Federal Budget 2026: International tax measures

Common Reporting Standard 

The government has announced its intention to better align Canada’s implementation of the Common Reporting Standard (CRS) with the international standard for the automatic exchange of financial account information. Global peer reviews have identified two key gaps in Canada’s current rules: 

1. Certain entities established to invest in or trade financial assets, but aren’t marketed to the public as an investment vehicle, may be excluded from certain due diligence and reporting obligations. 
2. Canada’s residency requirements may exclude partnerships that are intended to be captured under the CRS regime.  

Budget 2026 outlines the government’s plan to consult on measures to address these gaps. Specifically, Finance is seeking input on: 

1. How Canada’s CRS rules should be amended to align with the international model rules, including the departures noted above. 
2. How those changes can be implemented without creating unnecessary compliance burdens.  

Interested parties are invited to submit written representations to Finance by emailing consultation-legislation@fin.gc.ca by December 31, 2026.  

Taxable Canadian Property

Budget 2026 will change several tax rules governing the sale of Taxable Canadian Property (TCP) by non-residents. These measures, effective for dispositions on or after January 1, 2027, aim to reduce cash flow burdens for corporate vendors and simplify tax-deferred transfers. 

For non-resident corporations, the applicable withholding rates would be reduced to 15% (from 25%) for capital property and to 30% (from 50%) for specified TCP (including certain inventory or depreciable property). The reduced rates are intended to better align withholding with the ultimate tax liability of corporate vendors and reduce the cash-flow burden associated with the current rules. 

The budget also aims to simplify tax-deferred transfers under section 85 of the Income Tax Act will be simplified. Where the prescribed conditions are met, including filing the section 85 election within 30 days of the disposition and providing the CRA with the required notice, the purchaser would no longer be required to withhold or obtain a clearance certificate. The exemption will apply only where the transfer is fully tax-deferred and the purchaser concludes that no amount is included in the vendor’s income as a result of subsection 85(1) or 85(2).  

Additionally, the existing anti-avoidance rule applicable to certain section 85 rollovers would be amended to extend the relevant period for subsequent dispositions from three to five years and broaden its application to any property that derives more than 50% of its value from the originally transferred property.  
 

Excessive Interest and Financing Expenses Limitation 

Changes to the Excessive Interest and Financing Expenses Limitation (EIFEL) rules will broaden the ability of certain taxpayers to deduct interest expenses. The EIFEL rules generally limit a taxpayer’s ability to deduct net interest expense to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). Budget 2026 also expands rules relating to purpose-built rental housing and regulated energy utility businesses. These changes allow taxpayers to deduct interest on borrowed funds used indirectly for eligible activities by affiliated entities or partnerships, rather than directly by the borrower.  

Current proposed rules related to purpose-built rental housing require the borrower to use the funds directly in an eligible activity. Under the new proposal, the exception will be expanded to accommodate certain indirect borrowings, where the borrowed funds are used for eligible activities carried out by an affiliated corporation, trust, or partnership. It will also be available where the eligible activities are carried out by a partnership in which the borrower and its affiliates hold at least a 40% interest. 

For regulated energy utility businesses, Budget 2026 expands and clarifies the definition of a regulated energy utility business in Canada, which currently applies only if prices are established or approved by a government entity. The revised definition would also apply where all, or substantially all, of a business’ products or services are priced through arrangements that are (i) government-established, approved or guaranteed, or (ii) established through a government-operated market that facilitates delivery for consumption or use in Canada. 

These measures apply to taxation years beginning on or after October 1, 2023. However, for the purposes of consequential changes, the filing-due date of the taxpayer for a taxation year is amended to be the later of the normal filing-due date and 90 days after royal assent of the legislation. This means that for the relieving measure to have retroactive effect, taxpayers who have already filed returns may need to file certain elections and amended returns within 90-days after royal assent of the enacting legislation.