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On 29 April 2022, the Department of Finance released draft legislative proposals to address hybrid mismatch arrangements, which are cross‑border arrangements that are characterized differently under the tax laws of different countries. These proposals are the first of two separate legislative packages to implement into the Income Tax Act the recommendations of the OECD BEPS Action Plan to eliminate the tax benefits arising from hybrid mismatch arrangements.

This first package deals with "deduction/non‑inclusion" mismatches relating to hybrid financial instruments (including mismatches involving hybrid transfers of financial instruments and substitute payments relating to these instruments). Generally, these hybrid mismatches involve situations in which a payment relating to a financial instrument is deductible by the payer and is not included in the ordinary income of the recipient. The second package, which will implement the remaining recommendations of the Action 2 Report (to the extent relevant in the Canadian context), will be released for stakeholder comment at a later date and will apply no earlier than 2023.

Since the proposed rules are scheduled to take effect on 1 July 2022, taxpayers must act quickly to assess the impact of these rules on their financing arrangements and consider any appropriate response.