The OECD's Pillar Two framework introduces a 15% global minimum tax for large multinational groups. Canada has enacted its version of the rules, as have many other jurisdictions. For mid-market groups, the practical questions come in a clear order: are we in scope, or likely to be; what exactly do the rules measure; and which parts of the existing structure may no longer perform as expected.

Who Is in Scope

The Global Anti-Base Erosion (GloBE) rules apply to groups with annual consolidated revenue of at least €750 million in at least two of the four preceding fiscal years. Several points deserve attention at the margin:

  • The test looks backward. A group that crosses the threshold through growth or acquisition may come within scope sooner than expected, and specific rules apply to mergers and acquisitions.
  • The threshold is set in euros. Groups reporting in Canadian dollars should monitor exchange-rate effects as they approach it.
  • The top of the consolidation matters. For groups owned through private equity funds, family holding companies or other investment structures, the entity at the top of the consolidated financial statements determines whose revenue is tested.

The threshold is broadly aligned with the one used for country-by-country reporting, although the two tests are not identical. Groups below it are not directly subject to the rules, but in-scope acquirers and investors can be expected to examine a target's jurisdictional tax profile.

How the Rules Measure Tax

Pillar Two does not look at statutory rates, or at the group's overall effective tax rate. It calculates an effective tax rate for each jurisdiction, combining all group entities located there.

In broad terms:

  • GloBE income starts from the financial accounts used for consolidation, adjusted for specified items.
  • Covered taxes include current and certain deferred taxes, again with adjustments.
  • A substance-based carve-out tied to payroll and tangible assets reduces the profit exposed to top-up tax.
  • Top-up tax applies where the jurisdictional rate falls below 15%, on the profit remaining after the carve-out.

The rules then determine who collects that top-up tax. A qualified domestic minimum top-up tax in the low-taxed jurisdiction applies first. An income inclusion rule at the parent level collects what remains. An undertaxed profits rule acts as a backstop, allocating any residual top-up tax among other jurisdictions where the group operates.

Where Canada Stands

Canada's Global Minimum Tax Act received Royal Assent in June 2024. It implements an income inclusion rule and a domestic minimum top-up tax for fiscal years beginning on or after December 31, 2023. For fiscal years ending on or before December 31, 2024, the first Canadian returns were due by June 30, 2026. Later filings are generally due 15 months after year-end, or 18 months for a group's first year in scope.

The undertaxed profits rule has been proposed but, at the time of writing, is not yet law. Legislation introduced in May 2026 would apply it for fiscal years beginning after December 30, 2025, and would also implement new safe harbours agreed internationally. Groups should confirm the status of that legislation before relying on either element.

U.S.-Parented Groups and the Side-by-Side System

Following a G7 statement in June 2025, the OECD Inclusive Framework released a "side-by-side" package in January 2026. For groups whose ultimate parent is located in a jurisdiction recognized as having a qualifying minimum tax regime (initially, only the United States), top-up tax under the income inclusion rule and the undertaxed profits rule is generally treated as nil for fiscal years beginning on or after January 1, 2026.

Two qualifications matter for the Canadian operations of U.S. groups. Domestic minimum top-up taxes continue to apply, including Canada's own. And Canada's implementation of the new safe harbour depends on the legislation described above.

How Foreign Subsidiaries Affect the Result

For an expanding Canadian enterprise, the key exposure usually sits outside Canada. Because the calculation is jurisdictional, a low-taxed subsidiary cannot be averaged against higher-taxed Canadian operations. Common sources of a low jurisdictional rate include:

  • tax holidays, reduced rates and non-refundable incentives in the subsidiary's country;
  • intra-group financing, licensing or holding income concentrated in lightly taxed entities;
  • timing differences, losses and deferred tax positions that behave differently under GloBE than under local tax law; and
  • differences between local taxable income and the accounting income on which GloBE is based.

For a Canadian-parented group, Canada's income inclusion rule collects top-up tax on a low-taxed foreign subsidiary unless the subsidiary's own jurisdiction collects it first through a domestic top-up tax. Legislative proposals also address how foreign top-up taxes interact with Canada's foreign affiliate and foreign tax credit rules.

Safe Harbours and Simplifications

A transitional safe harbour based on country-by-country reporting data can remove a jurisdiction from detailed calculations if it meets specified tests. Internationally, it has been extended by one year, and Canada's corresponding extension forms part of the legislation introduced in May 2026. The January 2026 package also adds a simplified effective tax rate safe harbour for later years, subject to domestic implementation. These safe harbours depend on the quality of the underlying data, and a group that does not apply the transitional safe harbour for a jurisdiction in one year generally cannot return to it in later years.

Practical Priorities

For groups within scope or approaching it, the work is largely about readiness:

  1. Confirm scope annually, including the effect of planned acquisitions.
  2. Map every entity and permanent establishment by jurisdiction.
  3. Test safe-harbour eligibility and model jurisdictional effective tax rates.
  4. Review incentives, financing and holding structures designed around nominal rates.
  5. Confirm that finance systems can produce the data the returns require.

Pillar Two changes the question a CFO needs to ask of an international structure. The issue is no longer only where profit is booked, but what effective rate each jurisdiction produces under a common measure. Early modeling gives management time to adjust structures, data processes and transaction plans in an orderly way.

This brief provides general information and is not advice for a specific situation.