Boris Johnson and Canadian prime minister Justin Trudeau sealed the “agreement in principle” in a video call on Saturday, the Department for International Trade (DIT) said.
According to the UK Government, the agreement will pave the way for negotiations to start next year on a new comprehensive deal with Canada.
When the Brexit transition period ends on December 31 the Comprehensive Economic and Trade Agreement reached by the EU and Canada after seven years of negotations, will roll on into the new year.
As the terms remain the same, the agreement does not give any new benefits to business.
But industry groups expressed relief that their businesses will not face higher trade tariffs with Canada next month as they warned that similar deals were urgently needed.
Mr Johnson said the extension was “a fantastic agreement for Britain”, adding: “Our negotiators have been working flat out to secure trade deals for the UK and from as early next year we have agreed to start work on a new, bespoke trade deal with Canada that will go even further in meeting the needs of our economy.”
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Speaking during the video call, which also included International Trade Secretary Liz Truss and her counterpart Mary NG, Mr Trudeau said the deal meant that “now we get to continue to work on a bespoke agreement, a comprehensive agreement over the coming years that will really maximise our trade opportunities and boost things for everyone”.
Labour’s shadow foreign secretary Emily Thornberry welcomed the “necessary” deal.
“It is now vital that Boris Johnson and Liz Truss show the same urgency in securing the other 14 outstanding continuity agreements with countries like Mexico, Ghana and Singapore, where a total of £60 billion of UK trade is still at risk, and time is beginning to run out,” she added.
British Chambers of Commerce director general Adam Marshall said the deal “will be warmly welcomed” but warned that similar continuity deals were urgently needed with other key markets, including Turkey and Singapore, to avoid “a damaging cliff edge for both importers and exporters”.
He repeated his call for a deal to be struck with the EU, describing that as the “single most critical trade agreement our business communities need”.
Federation of Small Businesses chairman Mike Cherry added: “There was always a danger that the end of the transition period would mean losing wider international market access that we enjoyed as part of EU membership.
“The fact that this new agreement upholds the small business chapter that was previously in place is very welcome. We look forward to such chapters being at the centre of all future UK trade deals.”
Confederation of British Industry director-general Josh Hardie said it was “great news for businesses” and that the agreement can “lay the foundations for an even deeper trade agreement”.
Before it is formally signed, the UK-Canada Trade Continuity Agreement will be subject to final legal checks.
Additional reporting by PA Media.