Budget 2014: Thin Cap And Withholding Tax Rules Get Tougher

In order to prevent non-residents of Canada from stripping profits from Canadian corporations in the form of deductible interest, the Income Tax Act (Canada) has a set of rules (the "thin cap rules") designed to limit the amount of deductible interest that can be paid by a Canadian¹ corporation to specified non-resident shareholders. Generally the thin cap rules provide that if the amount of the debt owing by the Canadian corporation to specified non-resident shareholders is greater than 150% of the equity invested in the Canadian Corporation by the specified non-resident shareholders, the Canadian corporation may not deduct interest on the excess debt and will have the excess interest deemed to be a dividend for the purposes of calculating any applicable non-resident withholding taxes. Generally speaking, a specified non-resident shareholder is a non-resident (or a non-arm's length group of non-residents) that owns 25% or more of the shares of the Canadian corporation.