CANADA Trends and Developments Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
include other financing-related expenses and amounts economically equivalent to interest but would not include interest that is otherwise not deductible for tax purposes, such as interest denied under the thin capitalisation rules (see comments above regarding Canada’s thin capitalisation rules). Interest expens - es and interest income on debts between Canadian members of a corporate group would also generally be excluded from the new rules. The rules will apply to all Canadian corporations and trusts, except for (i) CCPCs that, together with any associated corporations, have taxable capital employed in Canada of less than CAD50 million; (ii) groups with Canadian net IFE of CAD1 million or less; and (iii) certain groups that operate almost entirely in Canada and have no significant foreign affiliates. The rules will indirectly apply to partnerships, owing to the inclusion of interest expenses and revenues that are recognised in a partnership (pro-rated on the basis of the corporation’s or trust’s share of partnership income). Interest denied under the EIFEL rules can be carried forward indefinitely by a taxpayer to the extent of its excess capacity for a given taxation year or can be effectively carried back for up to three years. Also, a company that is part of a group and has excess capacity to deduct interest under the EIFEL rules in a given taxation year or in the three immediately preced - ing years can generally transfer such available capac - In many situations, a foreign investor will establish a Canadian company for the purpose of purchasing the shares of a Canadian target company to achieve cer - tain tax benefits. Certain jurisdictions in Canada do not require any Canadian residents to be directors of a corporation, which can prove attractive to certain foreign investors. ity to other Canadian group members. Use of a Canadian acquisition company To the extent the purchase price for the shares of the Canadian target company is funded by the foreign investor with equity (“paid-up capital” for Canadian tax purposes), the Canadian acquisition company will, generally speaking, be able to return such paid-up capital free of Canadian withholding tax in the future,
provided it can satisfy applicable corporate solvency tests. See comments below regarding Canada’s divi - dend withholding tax. If the Canadian acquisition company borrows money to pay a portion of the purchase price, it may be pos - sible to offset the interest expense on such borrowing with the profits earned by the Canadian target compa - ny by amalgamating (a Canadian form of merger) the Canadian acquisition company and the Canadian tar - get company after the completion of the purchase of the target. See comments below regarding Canada’s thin capitalisation rules and interest withholding tax. Where a Canadian target company owns subsidiar - ies outside of Canada, it may be more tax efficient to move the ownership of such subsidiaries out of Can - ada after the completion of the acquisition. Subject to complying with technical tax requirements, it may be possible for a Canadian acquisition company to elect to increase or “bump” the cost base of the shares of such subsidiaries from the Canadian target company’s historic cost base in the shares up to the fair market value of such shares on the date the Canadian target company was acquired by the Canadian acquisition company – this is done in the context of the winding- up (or amalgamation) of the Canadian target company into the Canadian acquisition company. Management rollover Canadian tax rules do not permit a Canadian resident shareholder of a Canadian corporation to exchange its shares for shares in the capital stock of a non-Cana - dian corporation on a tax-deferred (or rollover) basis. A rollover may, however, be possible in circumstances where the shareholder receives shares in the capital stock of a Canadian corporation. In some cases, investors will implement an exchange - able share structure which allows management mem - bers (or other Canadian resident shareholders) of a Canadian target company to sell their shares of the Canadian target company on a rollover basis for “exchangeable shares” issued by a Canadian corpo - ration controlled by the foreign investors. The terms and conditions of the exchangeable shares and certain ancillary agreements permit the holders of exchange - able shares to exchange such shares in the future for
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