Canadian taxpayers may not be able to rely on the presence of hybrid mismatch rules in other jurisdictions to avoid adverse consequences under the Canadian proposals

Comments on the second round of hybrid mismatch rules include the following:

The hybrid payer rules can lead to results that do not appear to have been contemplated. For example, if a U.S. corporation has a wholly owned disregarded Canadian unlimited liability company (ULC) and the ULC provides contract R&D services to its shareholder on a cost-plus basis, the ULC's revenue does not qualify as dual-inclusion income because it its disregarded for U.S. purposes. Accordingly, even though the ULC is subject to Canadian tax on its profits, all of its otherwise deductible expenses could be denied under the hybrid payer rules.

Furthermore, anomalous results occur because dual-inclusion income is computed on an entity-by-entity basis, not a jurisdictional basis, as contemplated in the BEPS Action 2 report. For example, an operating company may pay a management fee to a separate legal entity that incurs compensation expense. If both entities are hybrids, the management fee could be disregarded for foreign tax purposes, causing the compensation expense to create a double-deduction mismatch. While the operating income qualifies as dual-inclusion income, the income and expense arise in separate legal entities and cannot be offset, potentially resulting in the denial of the compensation expense under the hybrid payer rules.

Under the Canadian hybrid-payer rules, a deduction will be denied only to the extent that it has not already been denied in the investor's country under that jurisdiction's own hybrid mismatch rules. However, a deduction may be allowed in the U.S. under its consolidated loss dual consolidated loss (DCL) rules but denied in Canada under its hybrid payer rules, which could occur because the U.S. includes subpart F or tested income when computing dual-inclusion income, whereas Canada does not.

Furthermore, Canada generally denies a deduction upfront and allows it later if sufficient dual-inclusion income arises; whereas the DCL rules allow the deduction initially unless the loss is later used to offset non-dual-inclusion income.

Finance has been asked for further guidance on whether the U.S. DCL rules qualify as hybrid foreign or foreign hybrid mismatch rules.

Regarding the imported mismatch arrangement rules, the Canadian rules align with the Action 2 recommendations in that an “imported payment” (i.e., a deductible payment by a Canadian taxpayer) can be linked with an “offshore mismatch payment” (i.e., the payment giving rise to an offshore hybrid mismatch) without the two payments being linked causally or factually in any way. Instead it is sufficient that the recipient of one payment be the payer of another within a chain of entities connecting the Canadian taxpayer with the payer of the mismatch payment.

Neal Armstrong. Summaries of Mark Dumalski, “The Unexpected Implications of Canada's Latest Anti-Hybrid Proposals,” International Tax Highlights, Vol. 5, No. 2, May 2026, p. 4 under s. 18.4(15.6) and s. 18.4(15.94).