A new exemption allowing US multinationals to sidestep global minimum tax rules leaves Canadian firms facing higher costs and tax burdens, according to a report published by the C.D. Howe Institute. The analysis finds that while Canadian multinationals must navigate both the complex new Pillar Two regime and Canada's existing foreign affiliate rules, their American competitors operate under a separate system with a lower effective rate and reduced compliance demands. The arrangement threatens to worsen Canada's competitive position and could encourage Canadian firms to relocate or be acquired by US-based buyers.
The global minimum tax regime, known as Pillar Two, was designed to ensure large multinationals pay at least a 15 percent effective tax rate in every country where they operate. The rules apply to multinational enterprises with annual revenues exceeding 750 million euros and came into effect for 2024, with the first filing deadline falling on June 30, 2026. Canada anticipates collecting approximately $2.7 billion from Pillar Two in 2026-27, then roughly $2 billion each year after that. However, following pressure from the US administration, the G7 agreed in June 2025 to exempt American multinationals from key Pillar Two provisions. The OECD formalized this "side-by-side" arrangement in January 2026, listing the United States as the sole country with a qualified exemption. Fifty countries have now adopted qualified domestic minimum top-up taxes that comply with the OECD model rules.
The side-by-side exemption creates two sources of competitive advantage for US firms, the report states. First, Canadian multinationals face "the full brunt of the global minimum tax rules" layered on top of existing domestic tax requirements, while US companies are "largely spared the supplemental compliance burden" from 2026 onward. Second, US multinationals benefit from a lower effective tax rate of just 12.6 percent on certain foreign income under their net CFC tested income rules, compared to the 15 percent rate Canadian firms face under Pillar Two. The report notes that US rules also permit "global averaging" of foreign taxes across all jurisdictions, whereas Pillar Two mandates strict country-by-country calculations that prevent high taxes in one nation from offsetting low taxes in another.
The competitive gap stems from fundamental differences in how the two systems work. Under Pillar Two's country-by-country approach, if a Canadian multinational has subsidiaries in both a low-tax and high-tax country, it must pay a 15 percent top-up tax on income from the low-tax jurisdiction regardless of higher taxes paid elsewhere. A comparable US multinational can average its foreign taxes globally, potentially avoiding any additional home-country tax entirely. The report argues this structural disadvantage "may create a structural incentive for Canadian MNEs to be acquired by US-based buyers," risking harm to "the Canadian economy, tax base, and global influence." The severity of the impact depends partly on whether low-tax countries maintain their newly adopted qualified domestic minimum top-up taxes or abandon them to attract US investment not subject to Pillar Two.
Rather than seeking its own side-by-side exemption—which would require abandoning Canada's territorial tax system for a worldwide approach—the report recommends Canada "build on the competitiveness advantages of its existing foreign affiliate regime" by adopting a full exemption system for foreign affiliate income. This would eliminate costly surplus-tracking requirements that the 2008 Advisory Panel on Canada's System of International Taxation found generated little revenue because firms simply defer repatriating profits that would trigger additional Canadian tax. The report concludes that simplifying the foreign affiliate rules would "reduce needless reporting and compliance burdens for Canadian MNEs and help offset the impacts of the new Pillar Two global minimum tax regime, with minimal revenue loss."