Identifying an imported mismatch arrangement may require complex or impossible determinations as to foreign arrangements

A general discussion of the second package of hybrid mismatch rules released on January 29, 2026 includes a discussion of the imported mismatch arrangement rules.

The proposed rules in ss. 18.4(15.91) to 18.4(15.95) to deny deductions for payments arising under an imported mismatch arrangement would apply to mismatch arrangements that are offshore, i.e., there is no Canadian entity directly party to the offshore mismatch, so that the deduction/non-inclusion (D/NI) or double deduction (DD) mismatch is not otherwise neutralized in Canada or under a foreign hybrid mismatch rule.

This result is accomplished through the concepts (in s. 18.4(15.92)) of an “importing payment”, i.e., a payment that is deductible in Canada made to an entity not resident in Canada, and a “mismatch payment,” i.e., a payment giving rise to an “offshore hybrid mismatch amount” – which, as determined under s.18.4(15.91), is a hybrid mismatch in respect of a payment where the payer or recipient is not a resident of Canada.

An imported mismatch arrangement may also apply in cases of payments that are indirectly related to an offshore mismatch. This is achieved through referring in s. 18.4(15.92) to the situation where there is an indirect link between the mismatch payment and the importing payment involving a chain of payments starting with the importing payment and ending with a payment made to the payer of the mismatch payment.

It is observed that:

The imported mismatch rules may deny a deduction in Canada in respect of a payment that is directly or indirectly connected to the offshore mismatch. This broad extension of the rules requires tracing payments made in offshore structures, identifying any D/NI and DD mismatches under foreign tax laws, assessing the operations of foreign hybrid mismatch rules in all affected jurisdictions, and identifying the linkage to any deductible payment supporting that offshore mismatch. … This is in contrast with the BEPS Report, which intended for imported mismatch arrangement rules to apply only where the taxpayer and the parties to the imported mismatch arrangement were part of the same control group.

Neal Armstrong. Summary of Tessa Reah and Brian Leslie, “From Instruments to Entities: Canada Expands Its Hybrid Mismatch Rules,” International Tax (Wolters Kluwer), February 2026, No. 146, p. 1 under s. 18.4(15.92).