Federal Budget 2013: How Will It Impact Your Business? - General Tightening Measures

Budget 2012 also proposes a number of other "tightening" measures.

Thin Capitalization

The thin capitalization rules in the ITA restrict the deductibility of interest payments made by a Canadian resident corporation on debt owing to certain specified non-residents. In its 2008 report, the Advisory Panel on Canada's System of International Taxation recommended that these rules be extended to partnerships, trusts and Canadian branches of non-resident corporations and that the maximum debt-to-equity ratio be reduced from 2:1 to 1.5:1. In Budget 2012, the thin capitalization rules were extended to partnerships with a Canadian-resident corporate partner, the maximum debt-to-equity ratio was reduced to 1.5:1 for taxation years that begin after 2012, and disallowed interest expense was deemed to be a dividend paid to the specified non-resident for Part XIII withholding tax purposes.