close
  1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar


Mergers and Acquisitions in Canada


The Treaty provides relief from Canadian income taxes only to residents of the U.S., as defined in Article IV of the Treaty. A “resident of a Contracting State” means “any person that, under the laws of that State, is liable to tax therein by reason of that person’s domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature.”

In The Queen v. Crown Forest Industries Limited,[[95 D.T.C. 5389 at 5395.]] the Supreme Court of Canada established that the concept of residence for the purpose of the Treaty entails “being subject to as comprehensive a tax liability as is imposed by a state,” and that such comprehensive taxation is taxation on worldwide income. Accordingly, the CRA has applied these indicia in determining whether certain special types of non-resident entities are residents of the U.S., and thus eligible for Treaty benefits.

“S” Corporation

A corporation that files an election under Subchapter S of the Internal Revenue Code[[Title 26 of the United States Code (26 U.S.C.).]] is commonly referred to as an “S” Corporation. This type of corporation may be treated as a flow-through entity for U.S. federal income tax purposes. However, administratively, the CRA considers an “S” Corporation to be a resident of the U.S. for the purposes of the Treaty.

U.S. Limited Liability Company

A U.S. limited liability company (“LLC”) that is treated as a flow-through entity for U.S. income tax purposes will not generally be subject to U.S. income tax on its worldwide income. The CRA previously took the position that an LLC was not liable to tax and was thus not a resident of the U.S. for purposes of the Treaty, and would not qualify for the benefits offered by the Treaty. Without the relief granted by the Treaty, dividends payable by a Canadian corporation to the U.S. LLC would be subject to withholding tax at a rate of 25%. The relief for capital gains, the rules governing the allocation of business profits, and the reduction in the Canadian branch tax, would also not be available. It should be noted that the CRA’s position may be incorrect (see TD Securities (USA) LLC, a decision of the Tax Court of Canada in April 2010).[[2010 D.T.C. 1137. This case held that an LLC was liable to tax in the U.S. and therefore a resident in the U.S. under the Treaty. Although the CRA did not appeal this decision it has publically stated that it disagrees with the decision.]]

However, the Treaty was amended effective January 1, 2009 and it now enables Canada to “look-through” U.S. entities that are fiscally transparent to determine their entitlement to Treaty benefits. Although an LLC itself is not entitled to Treaty benefits, under the Treaty, it can claim the benefits that are available to its U.S. resident members as a result of the look-through provisions.

Limitation on Benefits Provision

The Treaty has been recently amended to include a limitation of benefits (“LOB”) provision which deals with entities that are not ultimately owned by U.S. entities or by public corporations, the principal class of shares of which are primarily and regularly traded on recognized U.S. or Canadian stock exchanges. The LOB rules are aimed at countering “treaty shopping” by non-residents. This is the first LOB provision utilized by Canada and, accordingly, there is only limited guidance in Canada on such rules. In general terms, the rules operate to deny Treaty benefits to any U.S. entity which otherwise meets the requirements under the Treaty, unless certain tests are met.

Generally, a U.S. or Canadian public company whose shares regularly trade on a recognized Canadian or U.S. stock exchange can benefit from the Treaty. A U.S. company controlled by five or less U.S. individuals who own at least 50% of the votes and value of the company can also benefit from the Treaty. In addition, U.S. residents may qualify for Treaty benefits under the LOB provision if the income in question is earned in Canada in connection with, or incidental to, a trade or business carried on in the U.S., and the trade or business in the U.S. is substantial in relation to the activity carried on in Canada. In certain situations, the U.S. resident may qualify for certain Treaty benefits if the ultimate owner of the U.S. resident is a resident of a country with which Canada has entered into a comprehensive tax convention, which provides similar treaty benefits as those set out in the Treaty, and certain other tests are satisfied. Alternatively, a U.S. resident may apply to the Canadian Competent Authority for a determination of the applicability of Treaty benefits on the basis of all relevant factors. In this regard, it will be necessary to show that the principle purpose of the creation and existence of the U.S. resident was not to obtain benefits under the Treaty that would otherwise not be available, and that it would be appropriate, having regard to the purposes of the LOB rules, to not deny Treaty benefits. If the CRA determines that either test applies, the U.S. resident will be granted the benefits of the Treaty.

It should be noted that at present, the Treaty is the only one which includes a LOB provision which is applicable to Canadian taxes.In 2013, the Canadian government announced its intention adopt new legislation to counter treaty shopping. In 2014, the Federal Budget proposed certain treaty shopping rules to counter the abuse of Canada’s tax treaties. However, these proposed rules are not likely be enacted until formal recommendations from the OECD on the Base Erosion and Profit Shifting (BEPS) Project are released.

Additional posts from the blog

May

21

New Bill Heightens Potential for More Investment Canada Reviews of SOE Acquisitions

by Sandra Walker

Last week the Canadian Government introduced amendments to the Investment Canada Act (ICA) to implement its revised policy towards state-owned enterprises (SOEs) which it announced in December last year. At that time, while it approved the acquisition by Chinese SOE, CNOOC, of Canadian oil and gas company, Nexen, the Government announced its intention to prohibit acquisitions of control of Canadian oil sands businesses by SOEs except on an exceptional basis. It also stated that joint ventures and minority investments were welcome. In addition, the government indicated it would closely monitor SOE acquisitions in other sectors of the economy and would distinguish between SOE and non-SOE investments when setting the ICA review threshold. (See Focus on Foreign Investment Review, December 2012)

May

13

The Autorité des marchés financiers Proposes An Alternative Approach to Securities Regulators Intervention in Defensive Tactics

by Guy Paul Allard

On March 14, 2013, the Autorité des marchés financiers (“AMF”) published for comments a consultation paper (the “AMF Proposal”) pertaining to defensive tactics in response to take-over bids. This consultation is taking place concurrently with the one launched the same day by the Canadian Securities Administrator (“CSA”) with the release of proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). Unlike the CSA’s 62-105, the AMF Proposal addresses all defensive tacticsii, not only security holders rights plans.

May

10

Proposed New Framework for Rights Plans a Potential Game Changer for Hostile Bids

by Daniel Katzin

The Canadian Securities Administrators published for comment a proposed new regulatory framework for rights plans under proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). If adopted, 62-105 would provide issuers with a game changing tool to respond to hostile take-over bids, where a target board will be able to use a rights plan as leverage to negotiate with a potential bidder.



Privacy Policy | Terms of Use
Dentons
FMC Law

© 2017 Dentons