Joint Committee notes scope concerns over the expanded hybrid mismatch rules

In addition to pointing out numerous substantial anomalies and technical difficulties, including various inappropriate departures from the more limited scope of the BEPS Action 2 Report, the Joint Committee submission on the January 29, 2026 extension of the hybrid mismatch rules makes a spirited submission on a particularly fundamental scope issue.

The Committee submits that the application of withholding tax under s. 214(18) to hybrid payer situations is an unwarranted and unnecessary extension of the ambit of the Action 2 report. The mischief addressed by the rules is unrelated to profit distributions or disguised payments, and is wholly addressed by denying the excess deductions.

Similarly, the application of withholding tax to interest paid under reverse hybrid arrangements seems inappropriate given that the deduction/non-inclusion mismatch arises from the hybrid tax status of the recipient, rather than the hybrid tax treatment of the arrangement (i.e., it is not an arrangement in which payments are treated as interest for Canadian, and dividends for foreign, tax purposes.) The interest payments do not represent disguised distributions out of the Canadian tax system, as the recipient's status as a reverse hybrid entity generally results from ownership by Canadian residents.

Even if withholding tax were to be applied to hybrid payer arrangements, withholding tax should not apply to ordinary arm's length borrowings. Although s. 214(18)(b) limits deemed dividend treatment to arm's length non-residents unless the non-resident is a “party” to a structured arrangement, this concept turns in part on being aware of the mismatch in tax outcomes, which will be readily evident whenever, for example, the borrower is a hybrid entity.

Arm's length lenders will not accept any withholding tax risk that arises simply because the borrower is a hybrid entity, a dual resident, or has a foreign branch.

Neal Armstrong. Summaries of Joint Committee, “Submission on Hybrid Mismatch Arrangements - Technical Comments and Recommendations,” 10 March 2026 Joint Committee submission under s. 18.4(1) – ordinary income, dual income inclusion, structured arrangement, hybrid entity, s. 18.4(5.6), s. 18.4(7.1), s. 18.4(15.1), and s. 214(18).