The Deemed Dividend Dilemma: Structuring Your Cross-Border Credit Support

We frequently act as Canadian counsel to lenders and borrowers in cross-border transactions where credit support is provided to a US parent company by one or more of its Canadian subsidiaries. In structuring the deal, a considerable amount of time can be spent determining the extent to which the collateral of the Canadian subsidiaries should secured.

The reason for this dilemma is because of section 956 of the US Internal Revenue Code, which creates a deemed dividend on the income of any controlled foreign corporations (CFCs) irrespective of whether or not the dividend is in fact papered and paid back to the US parent. A CFC is defined as any foreign company of which more than 50% of the total combined voting power of all classes of shares are entitled to vote or more than 50% of the total value of its shares are owned by US domiciled shareholders. Each "US Shareholder" of a CFC is required to include in their gross income as a deemed distribution their pro rata