New Tax Issues For Foreign Buyers

One of the most important considerations for M&A purchasers (especially in cross-border transactions) is managing the tax issues. Foreign purchasers of Canadian entities will need to plan around significant changes to the Income Tax Act (Canada) enacted in 2012.

First of all, revisions were made to Canada's "thin capitalization" rules in 2012. These rules limit the extent to which a Canadian-resident corporation ("Canco") can deduct interest expense incurred on debt owing to "specified non-residents": non-residents of Canada who either are 25%+ shareholders of Canco or who deal non-arm's length with such 25%+ shareholders. Effective January 1, 2013, Canco can only deduct interest expense on an amount of debt owing to specified non-residents equal to 150% of Canco's "equity" (start-of-year unconsolidated retained earnings plus the paid-up capital ("PUC") of Canco shares owned by a non-resident 25%+ Canco shareholder). Previously, the limit had been 200% of such