A Two-Track Tax World? Rethinking Canada’s International Tax System

September 24, 2026 - A new international tax compromise that could give US multinationals an advantage over their Canadian competitors adds urgency to improving Canada’s tax competitiveness. Canada can respond by simplifying the tax rules facing Canadian companies competing globally and eliminating unnecessary compliance burdens, according to a new C.D. Howe Institute report.

In Uneven Playing Field: The Global Minimum Tax and Canadian Competitiveness, author Geoffrey S. Turner examines the implications of an emerging two-track international tax system. Canada and many other countries have adopted new rules intended to ensure large multinational companies pay a minimum 15 percent effective tax rate on income arising in each jurisdiction where they operate. The United States, however, will continue to apply its own international tax system to US multinationals under a new “side-by-side” international compromise.  

Rather than seek its own side-by-side exemption, which would require Canada to replace its largely territorial approach with a worldwide system, Turner argues Canada should build on the competitive advantages of its existing foreign affiliate regime.  

“Canada should respond to this competitive threat by simplifying the foreign affiliate rules through a full exemption system, as recommended by the Advisory Panel on Canada’s System of International Taxation in 2008,” says Turner. “This would reduce needless reporting and compliance burdens for Canadian multinational enterprises and help offset the impacts of the new Pillar Two global minimum tax regime, with minimal revenue loss.” 

Canada’s existing rules already largely exempt qualifying foreign business income from additional Canadian tax, while requiring companies to track different categories of foreign-source income in multiple surplus accounts, sometimes over decades. 

With Canadian companies now facing an additional layer of Pillar Two rules that their US competitors largely avoid, Turner suggests that simplifying Canada’s international tax system should be part of a broader effort to improve our country’s tax competitiveness. 

“The optimal Canadian policy response should urgently prioritize the competitiveness of Canada’s tax system, including reductions in the general corporate tax rate and simplifications to ease the compliance burden,” says Turner. “While this cannot directly offset the potential advantages for US MNEs relative to Canadian MNEs under the side-by-side system, competitiveness improvements can at least narrow the gap.” 

Read the Full Report 

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. 

For more information, contact: Geoffrey S. Turner, Adjunct Professor and Tax Counsel-in-Residence, University of Toronto Faculty of Law; Vaishnavi Santhirathasan, Communications Coordinator, C.D. Howe Institute, 416-865-9935, vsanthirathasan@cdhowe.org.