29 January 2026 External T.I. 2025-1083821E5 - Pillar Two - CPA Canada Q. 15

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether subsections 14(1), 14(3) and 15(1) of the Global Minimum Tax Act ("GMTA") align with the Tax Challenges Arising from the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two) (the "Model Rules"), given that subsection 14(1) of the GMTA simply provides that a person must pay top-up tax in an amount determined under subsection 15(1) of the GMTA if, among other conditions, the person is a "relevant parent entity," and that such term is defined in subsection 14(3) of the GMTA without expressly establishing any priority for a POPE to levy top-up tax.

Position: Yes, although the legislative structure differs, the combination of subsections 14(1), 14(3) and 15(1) of the GMTA produces the same "priority" for POPEs as per the application of the Income Inclusion Rule ("IIR") in Article 2.1 of the Model Rules and the IIR offset mechanism in Article 2.3 of the Model Rules.

Reasons: The GMTA and the Model Rules.

XXXXXXXXXX 2025-108382
Simon Morin

January 29, 2026

Dear XXXXXXXXXX:

Re: Priority of charging provision for POPEs

This letter is in reply to your request for interpretative assistance regarding the alignment of subsections 14(1) and 14(3) of the Global Minimum Tax Act (“GMTA”) with Articles 2.1 and 2.3 of the Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) (the “Model Rules”) in respect of the “priority” for a partially-owned parent entity (“POPE”) to levy top-up tax under the income inclusion rule (“IIR”).

More specifically, you have asked whether subsections 14(1) and 14(3) fully align with the Model Rules, given that subsection 14(1) simply provides that a person must pay top-up tax in an amount determined under subsection 15(1) if, among other conditions, the person is a “relevant parent entity” (as that term is defined in subsection 14(3), hereafter an “RPE”), without expressly establishing any priority for a POPE to levy top-up tax.

Unless otherwise stated, all statutory references herein are to the GMTA.

CRA response

Articles 2.1 to 2.3 of the Model Rules provide the top-down approach to the application of the IIR. Under the top-down approach, the UPE is the first entity required to apply the IIR in respect of its ownership interest in a low-taxed constituent entity (“LTCE”) and is subject to tax in an amount equal to its allocable share of the top-up tax for that entity. Where the ultimate parent entity (“UPE”) is located in a jurisdiction where it is not required to apply a qualified IIR, then the intermediate parent entity (“IPE”) next in the ownership chain is required to apply the IIR to its allocable share of the top-up tax for an LTCE in which it holds a direct or indirect ownership interest.

Articles 2.1.4 and 2.1.5 of the Model Rules operate as an exception to the top-down approach and instead requires a POPE to apply the IIR. These provisions address split-ownership structures where a parent entity has a significant minority interest held by persons outside the MNE group. The phrase “[n]otwithstanding Articles 2.1.1 to 2.1.3” in Article 2.1.4 of the Model Rules makes clear that a POPE is required to apply the IIR whether or not it is in a lower tier of the ownership chain. To prevent double taxation in such cases, the offset mechanism in Article 2.3 of the Model Rules reduces the top-up tax liability of the UPE (or next-tier IPE, if the UPE is not required to apply a qualified IIR) with respect to any portion of the top-up tax charged to the POPE. The result of the application of Articles 2.1 and 2.3 of the Model Rules is that the amount of top-up tax under the IIR is payable by the POPE in priority.

Subsections 14(1), 14(3) and 15(1) implement Articles 2.1 and 2.3 of the Model Rules. Subsection 14(1) imposes liability for top-up tax on certain persons in respect of a qualifying MNE group, including on an RPE in accordance with subparagraph 14(1)(b)(i). Under subsection 14(3), an entity is an RPE if it meets the conditions in paragraphs (a) and (b) and is one of the entities described in paragraph (c), namely, the UPE of the MNE group, an IPE (where the UPE is not located in Canada or a Pillar Two jurisdiction and where no other IPE that is located in Canada or a Pillar Two jurisdiction has a controlling interest in the IPE) or a POPE (unless the POPE is wholly owned, directly or indirectly, by another POPE that is located in Canada or a Pillar Two jurisdiction). Paragraph 14(3)(c) of the definition of RPE, taken in conjunction with the top-up tax liability provision that is subsection 14(1), effectively implements the IIR as provided under Article 2.1 of the Model Rules.

Subsection 15(1) calculates the amount of tax a person is liable for under subsection 14(1). The amount of the top-up tax liability is determined by subtracting the variable B amount from that of the variable A. In general terms, variable A aggregates an RPE’s allocable shares of underlying top-up amounts of constituent entities that are not located in Canada and in which it holds an ownership interest. Variable B is generally the aggregate of any portions of the allocable shares included in variable A in respect of which any lower-tier RPE is subject to tax under Part 2 of the GMTA or a qualified IIR of another jurisdiction. Effectively, variable B implements the IIR offset mechanism provided under Article 2.3 of the Model Rules.

While subsections 14(1) and 14(3) of the GMTA do not, on their face, adopt the same drafting structure as Article 2.1.4 of the Model Rules, such as a “notwithstanding” formulation, when read together with subsection 15(1), they achieve the same result.

The combination of subsection 14(1) and subparagraph 14(3)(c)(iii) ensures that a POPE (that is not wholly owned, directly or indirectly, by another POPE located in Canada or a Pillar Two jurisdiction) constitutes an RPE even where a higher-tier UPE or IPE is located in a jurisdiction applying a qualified IIR, effectively reflecting Article 2.1 of the Model Rules. Under subsection 15(1), any portion of a constituent entity’s top-up amount that is brought into charge at the POPE level is excluded from the tax otherwise payable by an upper-tier RPE through the operation of variable B in the subsection 15(1) formula, effectively reflecting Article 2.3 of the Model Rules.

In light of the above, it is our view that the combination of subsections 14(1), 14(3) and 15(1) of the GMTA results in the same “priority” for POPEs as per the application of the IIR in Article 2.1 of the Model Rules and the IIR offset mechanism in Article 2.3 of the Model Rules, despite not adopting the exact same drafting structure.

We trust our comments will be of assistance.

Yours truly,

Pierre Girard
Section Chief
For Division Director
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch