On 23 July 2026, the Department of Finance released draft legislative proposals for public comment. The draft legislative proposals implement certain measures announced in the 2025 federal budget (Budget 2025) and 2026 spring economic update (SEU), as well as other previously announced measures and new technical amendments.

The release of the draft legislative proposals includes: (1) a general package of draft income tax legislative proposals; (2) a package of draft legislative proposals relating to various income tax technical amendments; (3) a small package of draft legislative proposals relating to the Global Minimum Tax Act; and (4) a package of draft indirect tax legislative proposals. Descriptions of each package follow.

The general package of draft income tax legislative proposals (with explanatory notes) includes certain remaining Budget 2025 measures and 2026 SEU measures, as well as updated amendments to implement the second package of hybrid mismatch arrangement rules (which were first announced in 2021). These measures are described in further detail below (see "General package").

The package of draft legislative proposals relating to various income tax technical amendments (with a subsequent release of explanatory notes on 27 July 2026) include various technical amendments as well as updated technical amendments to: (1) the provision of services base erosion rule in subparagraph 95(2)(b)(i) of the Income Tax Act (the Act) under the foreign accrual property income rules, which were released in August 2022; and (2) updated technical amendments to the shareholder debt rules and to the tax on repurchases of equity, which were both released in August 2024. Among the new technical amendments are amendments relating to the excessive interest and financing expenses limitation rules, the calculation of the net capital cost additions for reaccelerated investment incentive property and zero-emission vehicle property under the capital cost allowance (CCA) rules, the determination of labor expenditures for purposes of the film or video production tax credits, the definition of taxable Canadian property, and imputed interest benefit rules. (A detailed summary of the more significant technical amendments will be provided in an EY News article available to subscribers of the Federal Income Tax Collection on the Canadian Tax Library and Knotia.)

The small package of draft legislative proposals relating to the Global Minimum Tax Act (with explanatory notes) includes a technical amendment to restructure the definition of a deduction/non-inclusion arrangement for purposes of the transitional country-by-country reporting safe harbor rules, to align it with the corresponding definition in paragraph 93 in Annex A, Chapter 1 of the Global Anti-Base Erosion (GloBE) Commentary (as introduced in the December 2023 Organisation for Economic Co-operation and Development (OECD) administrative guidance). This amendment applies to fiscal years of a qualifying multinational enterprise group that begin on or after 31 December 2023.

The package of draft indirect tax legislative proposals (with a subsequent release of explanatory notes on 27 July 2026) includes the Budget 2025 measure relating to the establishment of a new goods-and-services tax/harmonized sales tax (GST/HST) reverse charge mechanism for certain supplies in the telecommunications sector (applicable as of the first day of the second month following the month in which the enacting legislation receives Royal Assent). Various technical amendments have also been made to the Excise Tax Act, the Excise Act, 2001, the Air Travellers Security Charge Act, the Select Luxury Items Tax Act and certain related regulations. (A summary of the more significant amendments will be provided in an EY News article available to subscribers of the GST/HST and Excise Tax Collection on the Canadian Tax Library and Knotia.)

Interested parties are invited to provide comments by 4 September 2026 on the proposed amendments contained in the above packages of draft legislation.

This Tax Alert provides a summary of the proposals included in the general package of draft income tax legislative proposals.

General package

Business income tax measures

Accelerated CCA for eligible low-carbon liquefied natural gas (LNG) equipment and buildings

As announced in Budget 2025 and detailed in the 2026 SEU, amendments have been made to reinstate accelerated CCA rates for low-carbon LNG facilities with respect to eligible LNG equipment and related buildings acquired on or after 4 November 2025 and before 2035. An accelerated CCA rate of 50% for certified liquefaction equipment (i.e., eligible Class 47 property) and 10% for certified liquefaction buildings, both of which are primarily used to support the functioning of a certified liquefaction facility, will be available (i.e., provided the expected emissions intensity of the liquefaction facility for its first operating year is less than or equal to 0.20 (metric) tonnes of carbon dioxide equivalent per tonne of LNG produced).

Eligible property rules, along with other applicable rules, will be the same as for the previous accelerated CCA measures for liquefaction equipment and related buildings, which were introduced in 2015 and expired at the end of 2024. Accelerated CCA rates will only be available for eligible assets for a certified liquefaction facility if the facility is certified by the Minister of Natural Resources. To obtain this certification, the liquefaction facility owner must submit a one-time liquefaction facility plan prepared by a qualified third-party Canadian engineering firm that includes a front-end engineering design study and the expected emissions intensity of the liquefaction facility, in addition to any other information required by the Minister of Natural Resources.

The accelerated CCA may be claimed only against income from eligible liquefaction activities at a certified liquefaction facility; special rules will apply for the determination of this income if the taxpayer is not engaged exclusively in the operation of a liquefaction facility. Several supporting definitions have been introduced, including "carbon dioxide equivalent," "certified liquefaction buildings," "certified liquefaction equipment," "certified liquefaction facility," "expected emissions intensity," "specified greenhouse gas," "first operating year," "qualified engineering firm," "liquefaction facility plan" and "specified operating configuration."

Carbon capture, utilization and storage (CCUS) investment tax credit: expansion

As announced in the 2026 SEU, the eligible uses of captured carbon for purposes of the credit have been expanded to include enhanced oil recovery (EOR), generally effective as of 28 April 2026. The effective credit rates for eligible expenditures incurred with respect to captured carbon stored through EOR will be one-half of the rates applicable to the current eligible uses of dedicated geological storage and storage in concrete (recognizing the additional revenue stream available to CCUS projects involving EOR).

Specifically, from 28 April 2026 to the end of 2035, the effective tax credit rates for eligible expenses incurred under a qualified CCUS project involving EOR will be 30% for eligible direct air capture equipment, 25% for other eligible capture equipment, and 18.75% for transportation and EOR storage equipment. For eligible expenditures incurred after 2035 and before 2041, these rates are reduced to 15% for eligible direct air capture equipment, 12.5% for other eligible capture equipment, and 9.375% for transportation and EOR storage equipment, consistent with the reduction in credit rates for the phase-out of the credit.

To implement these rates, half the carbon intended for storage through EOR will be considered an eligible EOR use in determining the credit amount for qualified carbon capture expenditures and qualified carbon transportation expenditures, and only one-half of the capital cost of eligible storage property will be considered in determining the credit amount for qualified EOR storage expenditures. As a result, eligible equipment will be expanded to include capture and transportation equipment used in a qualified CCUS project involving EOR, as well as equipment required to reinject and store captured carbon through EOR, unless all or substantially all of the equipment's use is to handle or produce oil. Additional requirements for eligible EOR equipment will be provided in technical guidance published by Natural Resources Canada.

Eligible carbon capture or transportation equipment used in a mixed-use project involving the storage of captured carbon through both EOR and other eligible uses will be eligible for the tax credit on a weighted-average basis, according to the quantities of captured carbon for each eligible use under a project's most recent project plan. A minimum of 95% of captured carbon intended for an eligible EOR use over a CCUS project's review period (generally, 20 years) is expected to be stored permanently. Rules relating to the recovery of the tax credit where a project's eligible use percentage decreases by a certain percentage will also apply in respect of EOR operations. Related amendments are also made to the clean hydrogen investment tax credit and clean electricity investment tax credit to recognize EOR as a form of carbon storage.

A new technical amendment to the CCUS investment tax credit rules will extend the deadline to file the annual climate risk disclosure report, the construction and completion knowledge sharing report, and the annual operations knowledge report to the later of 31 December 2026 (instead of 31 December 2025) and each otherwise specified deadline. This amendment retroactively applies to the introduction of the credit on 1 January 2022.

Hybrid mismatch arrangements

Updated amendments will implement the second package of rules intended to neutralize hybrid mismatch arrangements (as originally announced in the 2021 federal budget and previously released as draft legislation on 29 January 2026). Hybrid mismatch arrangements are described as cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatched tax results (e.g., deduction/non-inclusion mismatches and double deduction mismatches).

The first set of rules, which was enacted in 2024, generally applies to neutralize a deduction/non-inclusion mismatch arising from a payment in respect of a financial instrument (applicable in respect of payments arising on or after 1 July 2022) and restricts the deduction of dividends received from a foreign affiliate generally to the extent that the dividend is deductible for foreign income tax purposes (generally applicable in respect of dividends received on or after 1 July 2022).

The new second package deals with other forms of hybrid mismatches and makes certain consequential and technical amendments to the existing hybrid mismatch arrangement rules. In general, this second package extends the hybrid mismatch arrangement rules to payments arising under three new hybrid mismatch arrangements: (1) a reverse hybrid arrangement, (2) a disregarded payment arrangement, and (3) a hybrid payer arrangement. As well, for purposes of the rules, the definition of "structured arrangement" is amended to include, under the latest set of revisions and notably taking into account recommendations from the Canadian Bar Association-Chartered Professional Accountants of Canada (CBA-CPA) Joint Committee on Taxation, a transaction (or series of transactions) that includes a payment in respect of which there would be a hybrid mismatch amount or an investor hybrid payer mismatch amount if it were assumed that the payment arose under, or in connection with, a structured arrangement. References to double deduction mismatches are also added to several other provisions. In addition, various new rules and conditions related to the expanded rules (such as the addition of the concepts of offshore mismatches, imported hybrid arrangements and foreign structured arrangements) are included.

The draft legislative proposals, which generally apply to payments arising on or after 1 July 2026, are generally consistent with recommendations in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action 2 Report, with adaptations to the Canadian income tax context. As mentioned, some of the latest revisions to the proposed rules reflect comments received since their initial release on 29 January 2026. For example, as also recommended by the CBA-CPA Joint Committee on Taxation, new deeming rules (under proposed subsections 18.4(6.1) to (6.4) of the Act) have been introduced related to the definition of "ordinary income" in the context of dual inclusion income to better achieve the intended result and to avoid double counting.

The hybrid mismatch arrangement rules have also been updated to limit the amount denied under the proposed hybrid payer arrangement rule (under proposed subsection 18.4(7.2) of the Act) by limiting the amount of the deduction component of the double deduction mismatch to the lesser of the Canadian deduction and the foreign deduction. Updates have been made, in conjunction with a new amendment to subsection 18(4), so that the thin-capitalization rules apply in priority to the hybrid mismatch arrangement rules. The latest revisions generally also apply to payments arising on or after 1 July 2026, although the priority order changes for the thin-capitalization rules apply to payments arising on or after 23 July 2026. (For more information on the draft proposals released on 29 January 2026, see EY Global Tax Alert, Canada's Department of Finance releases proposed hybrid mismatch arrangement rules, dated 25 February 2026.)

Insurance or reinsurance of specified Canadian risks

As announced in Budget 2025 and previously released as draft legislation on 29 January 2026, updated amendments clarify that if a foreign affiliate does not deal at arm's length with an insurer resident in Canada, income from the holding of any property by the affiliate in connection with the insurance or reinsurance of specified Canadian risks is included in foreign accrual property income (FAPI), applicable to tax years of a foreign affiliate of a taxpayer beginning after 4 November 2025. In particular, investment income earned by a foreign affiliate of the Canadian insurer from property held to back specified Canadian risks of the insurer will now generally be FAPI.

Simplified transfer pricing documentation requirements

As announced in Budget 2025, prescribed conditions have been introduced under which a taxpayer or partnership will be eligible for simplified transfer pricing documentation requirements under recently enacted subsection 247(4.1) of the Act, applicable for tax years and fiscal periods that begin after 2025. To be eligible for the simplified documentation requirements for a tax year or fiscal period in respect of a transaction or series of transactions with a non-arm's-length nonresident, a taxpayer or partnership, along with all other members of the multinational enterprise group that are resident in Canada (other than a member of the partnership), must have gross revenue not exceeding CA$25m during the immediately preceding tax year or fiscal period. In addition, the taxpayer or partnership must not have disposed of an intangible property during the tax year or fiscal period to a non-arm's-length nonresident and must not have paid or credited a royalty to, or received a royalty from, a non-arm's-length nonresident during the tax year or fiscal period. Finally, the taxpayer or partnership must elect in prescribed form (on or before the documentation-due date for the tax year or fiscal period) to have the simplified documentation requirements apply.

If these conditions are met, the taxpayer or partnership must satisfy the prescribed simplified documentation requirements to make or obtain, on or before the documentation-due date for the tax year or fiscal period, records or documents that provide an accurate description of (1) the calculation of the above-mentioned gross revenue during the immediately preceding tax year or fiscal period (for purposes of the CA$25m limit), (2) the terms and conditions of the transaction or series, (3) the analysis performed to determine that the amounts are based on arm's-length conditions, and (4) for each subsequent year or fiscal period in which the transaction or series continues, each material change during the year or period in the documented gross revenue calculation, terms and conditions, or arm's-length analysis in respect of the transaction or series. As well, the taxpayer or partnership must provide these records or documents to the Minister of National Revenue within 30 days of being served a written request therefor.

A taxpayer or partnership is also deemed to satisfy the conditions for the simplified documentation requirements in respect of a transaction or series of transactions in a tax year or fiscal period with a non-arm's-length nonresident that involves the sale or purchase of tangible property for proceeds not exceeding CA$5m during the tax year or fiscal period, the provision or receipt of intra-group services for an amount not exceeding CA$2m during the tax year or fiscal period, or loans if the gross amount of interest on the loan does not exceed CA$1m during the tax year or fiscal period. In each of these cases, the taxpayer or partnership must also file an election to have the simplified documentation requirements apply. Simplified documentation requirements similar to the above-mentioned requirements regarding terms and conditions, arm's-length analysis and material changes are applicable in these additional circumstances.

An anti-avoidance rule also applies if it is reasonable to conclude that one of the purposes of the transaction or series of transactions is to benefit from the simplified documentation requirements.

Personal income tax measures

Disability tax credit

As announced in the 2026 SEU, amendments introduce several changes to simplify the administration of the certification process for the disability tax credit (DTC). A list of long-lasting medical conditions — for example, Alzheimer's disease — will be eligible for a streamlined DTC application process requiring a medical practitioner to confirm only that an individual has at least one of the listed conditions. The medical practitioner will no longer need to certify the extent and effect of the individual's impairment, although the Canada Revenue Agency will retain the authority to request additional information to ensure the DTC eligibility criteria were satisfied.

This streamlined process applies to DTC certifications issued for the 2026 and later tax years. The types of medical practitioners that may certify certain impairments are also being expanded, applicable to certifications issued after 2026 for 2027 and later tax years. Further, applicable to DTC certifications issued for 2026 and subsequent tax years, public guardians and trustees, or in Quebec, public curators, will be permitted to certify on a DTC application that an individual under their care for property matters has a valid certificate of incapacity issued by a healthcare professional. Similar powers will be granted to the Minister of Indigenous Services Canada and the Minister of Crown-Indigenous Relations and Northern Affairs Canada with regard to individuals under their care for property matters.

Red Seal completion bonus

Amendments that are consequential to the 2026 SEU announcement will increase apprenticeship completion rates by, in part, introducing a one-time CA$5,000 completion bonus for individuals who obtain certification in a Red Seal trade. (A Red Seal trade is a designation managed by the Canadian Council of Directors of Apprenticeship under the Red Seal Program and, in any other case, an equivalent provincially registered trade.) Under the amendments, the completion bonus will be included in the individual's income in the year the payment is received and subject to withholding tax requirements under subsection 153(1) of the Act; a deduction is also provided from any subsequent repayment of the bonus. Consequential amendments are also notably made to ensure a completion bonus is factored into the determination of the deduction for the cost of eligible tools purchased by an eligible apprentice mechanic or an employed tradesperson, and included in earned income for purposes of the childcare expense deduction. These amendments are deemed to have come into force on 28 April 2026.