The Canadian federal budget tabled on March 29, 2012 (the
"Budget") proposed a number of important
amendments that affect cross border planning with Canadian
corporations. One proposal modifies the Canadian "thin
capitalization" rules. This change is likely to affect a
significant number of existing financing structures involving
foreign-owned Canadian corporations, and may affect future
planning.
The Income Tax Act (Canada) limits the deductibility of
interest paid or payable by Canadian corporations in respect of
debts owing to certain non-resident lenders (generally lenders who
own more than 25% of the votes or value of the Canadian
corporation, or who do not deal at arm's length with such a
shareholder). The rules do not apply to third-party debt, nor does
third-party debt affect the permitted ratio. The current legislated
maximum debt to equity ratio is 2:1, and interest deductibility may
be denied if the Canadian corporation has debt to such lenders
which
