CANADA Trends and Developments Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
Legal Considerations in Canadian Private Equity Deals Antitrust/competition considerations In recent years, competition/antitrust enforcers around the world, including Canada, have taken a marked interest in private equity deals. This is part of a broad - er global trend towards tougher merger enforcement. As part of this enforcement effort, the Competition Bureau (the “Bureau”) now routinely requests informa - tion about a private equity investor’s minority share - holdings during the merger review process, including information concerning (i) any shareholders with at least a 10% direct or indirect interest in the applica - ble fund and (ii) any companies in which the applica - ble fund has at least a 10% direct or indirect interest. Further information may be requested regarding any interest held by these shareholders and companies that compete with the target. Private equity firms that take ownership positions (controlling or minority) in portfolio companies that are competitors have been subject to heightened scru - tiny. By way of example, in 2019, the Bureau sought to unwind a completed merger involving the acqui - sition of Aucerna (a company offering valuation and reporting software to oil and gas producers) by Thoma Bravo, a private equity firm, in circumstances where Thoma Bravo already owned a competitor of Aucerna. The litigation was subsequently settled by way of a registered consent agreement, after Thoma Bravo agreed to divest a major business within its control to a purchaser acceptable to the Bureau. Private equity investors may identify an industry of interest and contemplate a series of acquisitions over time to build sufficient scale and efficiency. In these circumstances in particular, care should be taken to develop credible longer-term arguments regard - ing market definition, viable and effective remaining competition, vertical issues and efficiencies that will substantiate a series of investments. Such credible and consistent arguments will be helpful before the Bureau and, if ultimately necessary, Canada’s Com - petition Tribunal. Finally, there is a greater focus in Canada on scru - tinising foreign investments in Canadian businesses on national security grounds, particularly investments
involving foreign state-owned enterprises (SOEs). A consequence of this focus is greater scrutiny of pri - vate equity investors that may have ties to or signifi - cant investment from foreign SOEs. Tax considerations Below is a general summary of certain Canadian income tax considerations relevant to private equity investments in Canada by non-Canadian investors (ie, “foreign investors”). Excessive interest and financing expenses limitation The 2021 Canadian Federal Budget expressed a con - cern with the erosion of the Canadian tax base due to deductions for interest paid disproportionately by Canadian members of multinational groups on third- party borrowings and paid by Canadian members on related-party borrowings to group members located in low-tax jurisdictions. On 20 June 2024, Bill C‑59, which includes the legislation to implement the exces - sive interest and financing expenses limitation (EIFEL) rules, received royal assent, thus making the EIFEL rules applicable for taxation years beginning on or after 1 October 2023. The rules limit the deduction by a Canadian corporation of interest and financing expenses (IFE), net of interest and financing revenues, to a fixed percentage of the company’s adjusted tax - able income that is derived from the company’s tax EBITDA. The fixed percentage starts at 40% for taxa - tion years beginning on or after 1 October 2023 and before 1 January 2024, decreasing to 30% for taxa - tion years beginning thereafter. There is also a “group ratio” rule applicable in certain cases, allowing a high - er ratio. The 2024 federal budget proposes to amend the EIFEL rules to provide for an elective exemption relating to purpose-built rental housing, effective for taxation years beginning on or after 1 October 2023. Such amendment was not included in Bill C‑59, and draft legislation to implement this exemption has not yet been released. Very generally, a company’s tax EBITDA is equal to such company’s taxable income before taking into account any interest expense, income tax and deduc - tions for depreciation and amortisation, each as deter - mined for tax purposes. Tax EBITDA excludes inter- corporate dividends from Canadian or foreign affiliates that qualify for certain deductions. Interest expenses
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