Hybrid arrangements can be used to exploit tax differences between Canadian and foreign tax laws. Budget 2021 proposed to eliminate the tax benefits from hybrid mismatch arrangements. In April 2022, the Federal Department of Finance unveiled draft legislative proposals related to hybrid mismatch arrangements. The proposals represent the first of two legislative packages aimed at incorporating the OECD's BEPS Action Plan recommendations into Canada's Income Tax Act. This initial package addresses "deduction/non-inclusion" mismatches associated with hybrid financial instruments. Typically, these mismatches occur when a payment for a financial instrument is deductible for the payer but not included in the recipient's ordinary income.
The second package, which will cover the remaining recommendations relevant to Canada, will be released later for stakeholder feedback and will not be applicable before 2023. No changes to these proposals were announced in the Budget.