Tower Financing: Deduction Denied

Taxpayers that have implemented cross-border tower financing structures and that have claimed a Canadian tax deduction for any U.S. taxes paid should revisit their structures carefully in light of the Tax Court of Canada's recent decision in FLSMIDTH Ltd., v. The Queen (2012 TCC 3), which is the Court's first decision concerning tower structures.

Tower structures – of which several variations have evolved over the years – have been used routinely by Canadian corporations to finance U.S. operations and by U.S. corporations to finance Canadian operations. Regardless of the variation, the principal tax benefit of a tower structure is the potential generation of two interest expenses within the cross-border corporate group with generally only one corresponding income inclusion. The ability to "double dip" is achieved through a series of intercompany transactions involving "hybrid" entities that are characterized differently under the tax laws of Canada and the United