Discipline: a key deal factor for mid-market companies

Earlier this year, we reviewed Deloitte and Touche LLP’s (Deloitte) 2016 survey of M&A trends (the Survey), which predicted that the year would match or exceed deal volume as compared to 2015. Deloitte recently published an article (the Article) which delves deeper into its Survey results from mid-sized companies, concluding that this demographic of the corporate world should be looking to implement more disciplined measures in deal-making.

The Survey polled approximately 1,800 companies, of which half comprised of mid-sized companies. These companies’ responses indicate that they are more concerned than their large-cap counterparts with “obtaining bargain-priced assets”. Mid-sized companies’ responses also highlight a higher rate of disappointment post-consummation of transactions.

The Article notes that while deal activity has remained relatively flat thus far in 2016, valuations for mid-market transactions have remained high. In this context of lofty valuations and scarce targets, the Article focuses on discipline in deals as a factor of critical importance. Of approximately 78% of the total companies canvassed in the Survey, it was noted that insufficient due diligence with respect to targets was a key barrier to success in M&A transactions.

Deloitte suggests practical steps that should be taken by mid-market companies in order to improve diligence and efficiencies on both the buy-side and sell-side. For acquisitive companies, the maintenance of a list which points out potential targets and bottom line strategies to adopt once the said targets become available would be a good start. Such a list would improve reaction times and post-deal integration.

In addition, the Article suggests that one of the main reasons why mid-market companies facing either side of the buy-sell coin consider that they are not ready to complete M&A transactions is because they may not be equipped to maintain a permanent, internal deal team. Companies should proactively build a team of trusted legal and financial advisors to engage in a variety of tasks from monitoring deal valuations in the industry to evaluating potential targets. A continuous flow of information about M&A activity, valuation trends and financing options in a company’s sector is key.

While pricing and valuation are typically the most significant factors in any M&A transaction, companies should ensure that a comprehensive process is implemented in the deal-making process in order to enhance deal results: Does the transaction meet strategic goals? Can the parties easily integrate culturally? Does it make sense financially?

The author would like to thank Vincent Belley, articling student, for his assistance in preparing this legal update.

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Deal protection measures: force-the-vote provisions

Negotiating an acquisition can be an intensive process for both buyers and sellers. For both parties, deal certainty is important when the right transaction is on the table. However for the target, the key is striking the appropriate balance between achieving deal certainty and ensuring that its board of directors maintains the ability properly discharge its fiduciary duties if a superior proposal is received.

A force-the-vote provision is a clause that requires the target’s board of directors to submit the proposed transaction to a vote of its shareholders. The provision protects the transaction since forcing a shareholder vote prohibits the approval of a third party offer until the target’s shareholders have voted on the proposed transaction. The process so triggered requires the target to prepare a proxy circular for approval of the transaction and obtain all the required regulatory approvals or consents before the vote can be held. This may take a considerable amount of time and consequently deter potential third party acquirors. This process may also make the target’s shareholders more inclined to vote for the deal that is on the table rather than wait around for the mere prospect of a more favourable transaction.

Although typically more popular in the US, force-the-vote provisions have also been included in Canadian acquisition agreements.

“Hard” vs “soft” provisions

Force-the-vote provisions can be drafted any number of ways. On one end of the spectrum, a “soft” provision permits a target to terminate the acquisition agreement if an alternative, unsolicited but superior offer comes along and the board determines that it must consider that offer in order to properly discharge its fiduciary duties. In all other circumstances, a vote on the proposed transaction must be held.

On the other end of the spectrum, the “hard” provision is unqualified and requires a vote of the target’s shareholders regardless of whether there is a superior offer. The target is not permitted to terminate the acquisition agreement as a result of the superior proposal, but the target’s board may change or withdraw its recommendation to its shareholders. In these circumstances, the buyer is generally afforded the right to terminate the agreement in advance of the meeting.

Key considerations

In evaluating whether or not the inclusion of a force-the-vote provision in an acquisition agreement is appropriate, a target’s board of directors should assess whether such a provision is in the best interests of its shareholders, taking into consideration the circumstances, merits and risks of a proposed transaction.

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Tax considerations for earn-outs and reverse earn-outs

As we have previously noted, earn-outs are becoming an increasingly common part of M&A deals, and there are a number of key commercial questions to consider when negotiating them. But there are also tax consequences that must be considered when structuring earn-outs.

Earn-outs link a portion of total purchase price to the performance of the business following the acquisition. In effect, the purchaser will hold back a portion of the purchase price, and if specified targets are achieved, all or a portion of the held-back purchase price will be paid to the seller. In contrast, a reverse earn-out requires the purchaser to pay the seller the entire purchase price up front. If specified performance targets for the business are not met, the seller will be required to repay a portion of the purchase price to the purchaser. While the two approaches may end up with the same before-tax result, the after-tax the outcomes can be quite different.

Treatment of earn-outs


Generally, earn-out payments are treated as income earned by seller, and not as capital gains. As a result, the entire earn-out payment will generally be taxable to the seller, rather than 50%. There are, however, certain situations where the Canada Revenue Agency (CRA) will, as a matter of administrative policy, treat earn-out payments as additional proceeds of disposition, giving rise to capital gains (50% which are taxable) when they become determinable by applying the “cost recovery method”.

The CRA’s policy applies only to earn-outs on share purchases where, among other things, the earn-out feature ends no later than 5 years after the sale, the earn-out feature relates to the underlying goodwill that the parties cannot reasonably determine, and the seller is resident in Canada. If the “cost recovery method” applies and the earn-out payments are to be made after the payment amount becomes determinable, the seller may be entitled to claim a capital gains reserve on the payment.


For the purchaser, the initial payment of the base purchase price will generally establish the purchaser’s tax cost in the property it acquires. Any earn-out payments will generally increase the tax cost of the property by the amount of the earn-out

Treatment of reverse earn-outs


The CRA’s policy is generally to treat the upfront payment of the purchase price as the seller’s entire proceeds of disposition on the sale. As a result, the seller will realize a capital gain (or capital loss) on the cash received upfront, 50% of which will be taxable to the seller. If the purchaser is then required to repay a portion of the purchase price under the reverse earn-out, the purchase price is generally treated as having been reduced by that payment, thus reducing the capital gain (or increasing the capital loss).


For the purchaser, reverse earn-outs are treated similarly to standard earn-outs. The upfront payment of the purchaser price will generally establish the purchaser’s tax cost in the property. Any amounts repaid by the seller under the reverse earn-out will serve to reduce the purchaser’s tax cost in the property. As a result, the purchaser will generally end up in the same tax position using either approach.


Earn-outs are a useful tool for ensuring that the actual value of property acquired in a share or asset sale is reflected by the final price. However, the tax consequences of earn-outs must be considered in their negotiation. If a vendor is not able to receive capital gains treatment on earn-out payments (as will be the case in all asset deals, and in many share deals), a reverse earn-out may be advisable.

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A rundown of “run-off insurance”

Run-off insurance is a particular aspect of director and officer liability (D&O) insurance that can protect directors and officers of a target company following an M&A transaction.  In many cases, a target company’s directors and officers will resign from their roles following an acquisition. Run-off insurance (also known as closeout insurance or run-off cover) protects directors and officers from claims made against them after they have stepped down.

D&O insurance will protect acting directors and officers, but it does not necessarily cover former directors and officers.  Former directors and officers could be unprotected if they don’t have some type of contractual indemnity in place. Run-off cover allows parties to buy insurance for departed directors and officers without the use of a director or officer indemnity provision.

Although the details of a run-off insurance policy may vary across providers, run-off insurance usually covers a specific period of time following the transaction – generally 6 years. The term of the run-off insurance is called the “run-off”. So long as a claim against the former director or officer is first made during the run-off period, it is covered by the insurance (regardless of whether the underlying event took place before or after the acquisition).

Run-off insurance can form part of a comprehensive D&O insurance policy or can be purchased separately as an add-on to an existing policy. It can also be purchased as a stand-alone policy and from a third party insurance company. Often, if run-off insurance is added on contemporaneously to an M&A transaction, the cost of the policy is paid for as part of the transaction. However, depending on the hostility of the transaction, the target company or the directors and officers may cover the cost of the policy directly.

Parties interested in obtaining run-off insurance following an M&A transaction should consider: whether there is an indemnity or insurance policy already in place to cover post-transaction claims; the length of the run-off needed; and the length of the statutory limitation period in the applicable jurisdiction. All this can inform the decision to obtain run-off insurance.

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Taking stock of SPACs

While the CPC program has existed for a number of years under the TSXV and Special Purpose Acquisition Companies (SPACs) have long been a feature of American capital markets, as we alerted in October of last year, SPACs are a relatively new arrival in Canada, with the first Canadian SPAC created in April 2015. The TSX has described SPACs as giving investors the ability to participate in the acquisition of private operating companies. Despite their attractions, SPACs have so far failed to meet investor expectations, both with respect to their ability to close transactions and their effect on private M&A.

A SPAC (also known as a “blank cheque company”) works by raising capital from investors in order to acquire a company. In many respects, SPACs are similar to Capital Pool Companies on the TSXV, though with higher capital requirements and slightly different rules. In simple terms, a SPAC will complete an IPO by issuing units typically comprised of a share and a warrant. Once the capital has been raised, the SPAC holds the proceeds of the IPO in escrow (where it earns interest  at typically treasury yields) pending completion of an acquisition during the next 21 months (or in certain circumstances 36 months) period. Acquisitions require shareholder approval, and dissenting shareholders will receive the opportunity to redeem their pro rata share of the escrow funds. If no acquisition is completed, investors will receive back their pro rata share of the escrow funds.

The TSX first adopted rules on SPACs 2008, and to date a total of 6 SPACs have completed IPOs in Canada, attracting more than $1 Billion in capital. Two of these SPACs have so far announced transactions. Yet, as the Financial Post notes in a recent article, the two deals announced so far “seem different from what some investors were hoping for when they piled $340 million into those two companies in the early part of last year.” Neither of the two announced transactions have had any effect on the private M&A market as the SPAC program expects. In one case, Dundee Acquisition Corp. has agreed to acquire CHC Student Housing Corp—a micro-cap public company listed on the TSXV. In the other, INFOR Acquisition Corp., has agreed to be bought by a unit of Element Financial—a public company.

Despite their failure to meet expectations so far, there are several factors in favour of continued investor interest. Usually there is relatively little downside: investors will receive at least treasury yield if a qualifying transaction is not completed. If there is a qualifying transaction and they do not dissent, they will capture upside from gains on their equity. For private companies that are potential targets, SPACs can offer a more convenient means of taking private companies public. They may also provide an attractive management team and strategic direction for the target. Nonetheless, the future success of SPACs will also depend on how well they fare in finding targets and making acquisitions. Only time will tell if the first two announced transactions are indicative of the future or if the SPAC market will develop in Canada as it was originally contemplated.

The author would like to thank Joe Bricker, articling student, for his assistance in preparing this legal update.

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M&A activity predicted in the marijuana industry

The marijuana industry has been high on analysts’ lists ever since Justin Trudeau and the Liberal Party were elected in late 2015. Some analysts predict the legalized pot industry to be a $5 billion market in Canada alone. Thus, it is clear that a new and lucrative market is burgeoning.

Analysts are predicting a high level of M&A activity in this space. The industry is currently comprised of many small players, which makes it attractive for bigger and more established corporations. Todd Hagopian, an analyst operating a market fund focused on the biotech industry, is predicting that big pharmaceutical corporations will likely become acquirers in the near future. His thinking is that they are cash heavy and are looking for new ways to continue growing. Moreover, M&A activity has already begun picking up momentum. Data from Viridian Capital Advisors (f/k/a Viridian Capital & Research), an index focused on the Cannabis industry, shows that 33 acquisitions were conducted in 2014. The president of the index, Scott Greiper, expects this acquisition activity to continue to grow into the foreseeable future.

It is true that the industry is not all green grass. There are a few weeds that need to be pulled out before it can flourish into its full potential; one such obstacle is full legalization, or at least an established and stable regulatory framework. The recently announced new set of regulations for accessing medicinal marijuana in Canada, the Access to Cannabis for Medical Purposes Regulations (ACMPR), may be seen as another stepping stone in that direction, as the ACMPR will replace the existing Marijuana for Medical Purposes Regulations (MMPR).  These new regulations, while an interim measure, are intended to expand patients’ limited access to marijuana under the old regulations and may also be seen as an endorsement of the system of “licensed producers” that has developed under the MMPR, as licensed producers will continue to be exclusive large-scale producers of cannabis under the ACMPR.  The ACMPR may therefore provide some comfort to industry players that regulated medicinal marijuana is here to stay. See here for more.

The author would like to thank Fahad Diwan, Summer Student, for his assistance in researching and preparing this legal update.

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Money makes the world go ‘round: lender protections in leveraged acquisitions

With Canadian prime and US federal interest rates maintaining an all-time low since the 1980s, the current market is well-positioned for leveraged acquisitions. Whether a purchaser does not have the liquidity to acquire a business or believes the potential growth of the investment will outpace any interest accumulating, the use of borrowed money to purchase a company is a shrewd business move.

Notwithstanding the favourable market conditions for leveraging, purchasers should expect that lenders will require certain lender protections in the acquisition agreement.

Xerox provisions

Introduced during the acquisition of Affiliated Computer Services, Inc. by Xerox Corporation (hence the “Xerox provisions) in 2009, the Xerox provisions have gained wide-spread use in the U.S. and in cross-border transactions and are achieving traction within home-grown Canadian deals. The Xerox provisions serve to ensure that: (1) payment of a reverse break fee limits the remedies of the seller against the purchaser, and also against the purchaser’s lenders and (2) lenders will not be subject to litigation from the seller with respect to the financing provided in favour of the purchaser. In order to achieve these limitations, the following provisions should be included in the acquisition agreement:

  • Sole and exclusive remedy. That the reverse break-fee is the only recourse of the seller against the purchaser and the purchaser’s lenders. Purchaser’s counsel needs to ensure that the reverse break-fee is the sole and exclusive remedy of the seller and that no other remedies, including specific performance, are available to the seller.
  • Direct enforcement. That the seller cannot directly enforce the lender’s obligations to fund the acquisition. Note that typically a seller’s counsel will negotiate for the right to force the purchaser to pursue litigation against any lender who fails to ‘pony up’ on their commitment once the financing conditions have been met.
  • Forum. That any litigation arising in respect of the financing be brought in New York. New York is the chosen venue in the US as it is considered a “lender-friendly” venue. For a Canadian only deal, preference would be for an Ontario court sitting in Toronto (i.e. the Commercial List), where the courts have the greatest exposure to complex commercial law matters
  • Jury trial. That the parties waive any right to a jury trial relating to the financing (to avoid uncertainty in proceedings)
  • Amendments. Restrictions on amendments to the foregoing provisions without lender’s consent. This provision can also be found in the financing agreement between the lender and the purchaser (or similarly, the financing agreement can (and frequently does) contain a provision requiring the acquisition agreement to be satisfactory to the lender)
  • Third-party beneficiary. Confirmation that the lender is a third-party beneficiary of the foregoing provisions. This differs from an assignment of the acquisition agreement which permits the lender to directly enforce the remedies of the purchaser against the seller.

The Xerox provisions are one of many ways that lenders seek protections when financing acquisitions but their availability may be limited by the status of the negotiations of the purchase agreement once a financing commitment is finalized. The bargaining strength of the purchaser and seller may also be a deterrent to a lender asserting itself into the purchase agreement. This is not to say in these situations a lender will be out of luck, simply that alternative protections will need to be used to protect a lender’s interest.

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New trend in distressed asset sales? “Pre-pack” sales under the CCAA

Over the past year, we have seen the Companies’ Creditors Arrangement Act (the CCAA) used in a novel way to execute prearranged sale transactions of distressed companies’ assets, potentially indicating a new manner in which companies and their advisors are using the CCAA.

In the typical asset sale under the CCAA, the applicant company obtains an order from the presiding court approving a competitive sale or auction process for the assets in question (be they all or only part of the assets of the company). The sale process is run by the court-appointed monitor (normally the restructuring specialists at an accounting firm), who will promote the sale of the assets, identify and contact potential purchasers and invite them to make bids on the assets. Once a winning bidder has been identified and an asset purchase agreement entered into, the sale is then approved by the court and the assets are vested in the purchaser by court order.

Yet while this has been how asset sales under the CCAA have traditionally been carried out, the recent examples of Nelson Education Ltd.[1] (commenced in May 2015) and Primus Telecommunications, Inc., et al.[2] (commenced just recently in January 2016) suggest an alternative approach. In each case, the debtor company ran a sales process of the sort that would normally be ordered by a court and identified a winning bidder for their assets, however they did so before commencing a CCAA filing.

This approach offers the insolvent seller a number of advantages. It minimizes the time spent in creditor protection, thereby reducing some of the court process’ high cost, and keeps disruption of the business to a minimum. Further, by significantly reducing uncertainty and by (to the extent possible) achieving a full going-concern sale, it also can create a “good news” story for creditors, suppliers, employees and other stakeholders right at the time of filing. That can in turn further minimize disruption of the business for the benefit of all stakeholders. As such, a pre-packaged sale can be helpful where the debtor is trying to preserve customer goodwill or other market value and time is of the essence in working out its financial distress.

For buyers, the situation can be a little more complex. On the one hand, many of the benefits that the shortened insolvency process has for the sold business redound to the purchaser, as the ultimate owner. On the other hand, the purchaser also enters into an auction process that is not overseen by a court, and so misses out on all the assurances for fair and equitable treatment that that would otherwise provide. Moreover, because the purchaser is dealing with an insolvent seller, prior to having the sale blessed by court order a buyer has little recourse and cannot rely on break fees or other tools that could normally be used to protect it against a seller who reneges on the deal.

Although the Primus and Nelson examples represent some of the first transactions of their kind under the CCAA, the prearranged “quick” sale does have a long history in the receivership context. And though the courts must submit a pre-arranged sale to the same scrutiny as would be applied to a post-filing sale, the jurisprudence suggests that a transaction will be approved so long as (a) the procedure that led to the sale was fair, reasonable, and conducted with integrity and (b) the transaction that results from such process fairly maximizes value for the debtor’s creditors and other stakeholders.

Thus for instance, courts have approved immediate sales where:

  • an immediate sale is the only realistic way to provide maximum recovery for a creditor who stands in a clear priority of economic interest to all others;
  • the sale transaction to be approved was the culmination of an exhaustive marketing process that had already occurred (whether conducted by the Monitor, or subject to its subsequent review);
  • the debtor had insufficient funds to engage in a further, extended marketing process (and without anyone having come forward to fund it either);
  • there was no realistic indication that another such sale process would produce a more favourable realization for the assets;
  • the secured creditors whose funds are at risk are unwilling to forego the sale for a possible “faint-hope” alternative in the future;
  • a failed sale would likely damage the value of the business, such as by leading to the loss of key customers or suppliers, jeopardizing its accounts receivable or impairing its goodwill; and
  • those parties who are objecting to the sale are unable to offer any concrete alternative.

In making such findings, courts will typically defer heavily to the business judgment of the monitor and the debtor. Be advised however, that in a “quick flip” sale transaction, courts have noted that the adequacy of the sales and marketing process is to be scrutinized with particular care to ensure transparency and integrity in the process and that it was performed in good faith.

Whether the approach taken in the Nelson and Primus cases ultimately bears out as a trend remains to be seen, but at the moment it looks like distressed M&A buyers and sellers have a new tool in the toolbox.

[1] Ontario Superior Court of Justice (Commercial List), Court File  CV-15-10961-00CL.

[2] Ontario Superior Court of Justice (Commercial List), Court File  CV16-11257-00CL.

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A global overview of M&A activity: H1 2016

MergerMarket Group recently published its July edition of Monthly M&A Insider which reported on mergers and acquisitions activity around the world during the first half of 2016, which was marked by a departure from last year’s record highs.

Global M&A

Global deal values fell by 26.8% to US$1.3tn across 7,794 transactions from H1 2015’s US$1.8tn across 8730 transactions. The Industrials & Chemicals sector lead the way with US$244bn in transaction value and 1486 deals, despite New Treasury rules aimed at dissuading tax inversions leading to the termination of the US$183.7bn Pfizer and Allergan transaction. Second most active sector has been Energy, Mining & Utilities with US$165.6bn and 603 deals driven by consolidation in the industry. A close third in deal value is the Pharma, Medical & Biotech sector with US$164.3bn and 626 deals, followed by Technology. Business Services place last with only US$121.9bn of deal value but show a high deal volume with 1107 transactions.

North America

While North America posted the lowest figures since 2013, the region nonetheless represented almost half of global M&A deal value and accounted for 2,495 transactions, 416 fewer than in H1 2015. While the M&A overall trend was downward sloping, private equity buyouts rose by 12% to US$73.9bn spearheaded by Apollo Global Management’s US$12.3bn purchase of home security provider ADT. Despite the cancelled M&A between Pfizer and Allergan, the Pharmaceuticals, Medical & Biotech sector had the highest deal value in H1 2016, with 258 deals worth US$110bn, representing a 23.6% decrease from the same period of 2015. The most notable deals of the first half of the year in North America included Microsoft’s US$25.5bn acquisition of the business social network LinkedIn; Danaher’s US$14.8bn spinoff of Fortive; and medical research provider Quintiles Transnational Holdings’ US$12.9bn merger with healthcare information company, IMS Health Holdings. On the Canadian side, TransCanada merged with Columbia Pipeline in US$12bn deal to create a big player in the midstream oil sector.


Economic uncertainty in the Eurozone and the UK’s decision to “Brexit” caused a slowdown in European M&A activity with deal value dropping 19.3% from US$425bn to US$342bn and a deal count decline of 177 deals to a total of 3,110 deals in 2016. In the UK there was a clear Brexit related slowdown with a decrease of 50.5% of deal value from US$38.2bn in Q1 to US$19.2bn in Q2. By contrast, M&A activity in Germany and France increased by 315.8% and 187.8% respectively in Q2 respective to the Q1 results. China continued to be a major driver of European M&A as Chinese deal activity accounted for 47.6% of total European inbound investment – the highest share of European M&A activity to date. According to MergerMarket intelligence Germany’s Industrial sector, particularly automation, semiconductor, and chemical companies are expected to be the most targeted sector in H2 of 2016.

Asia Pacific

M&A activity in Asia Pacific (excluding Japan) recorded 1588 deals with a total deal value of US$303.2, which is 30,7% downturn in deal value compared to H1 of 2015. While deal flow remained fairly constant, the drop in deal value can be largely explained by fewer mega-deals and a decrease in average deal value from US$290.2m to US$215.8m in H1. Despite the global drop in M&A activity, China posted a Year-on-Year increase of 13.2% to dominate the region with US$35.7bn, comprising 63.6% of total deal value in Asia-Pacific (excl. Japan). In contrast to the global trend, Technology was the dominant sector with 232 deals and US$53bn in value following by the Industrials & Chemical sector with 1362 deals and US$40bn in value benefiting from China’s growing demand to upgrade industrial technologies. Private equity recorded the highest first-half value in MergerMarket record, totaling 158 investments worth US$40.2bn which represents a 42.6% increase in value compared to H1 2015. Outbound activity also remained strong with Europe as the top investment destination with 87 deals worth US78.7.bn.

Contrary to the rest of the world, Japan’s M&A market soared to US$30.7bn over 199 deals representing a 67.8% increase in M&A deal value from H1 2015. This was Japan’s third consecutive year-on-year increase in deal value. While M&A was driven by the Industrials & Chemicals and Pharma, Medical & Biotech industries, performance was strong across the board. Similarly to China, Japan saw an uptick in investment in the European market with deal value increasing to US$4.5bn in Q2 from US$2bn in Q1.

The author would like to thank Hugo Margoc, articling student, for his assistance in preparing this legal update.

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Hybrid entities in Canada

In the context of cross-border business transactions, the term hybrid entity is often mentioned.  Generally, a hybrid entity is considered, for tax purposes, as one type of entity (e.g., a corporation) in one jurisdiction while being considered another type of entity (e.g., a partnership) in another jurisdiction.

One example of a hybrid entity is an unlimited liability corporation (ULC).  These are Canadian corporations that are offered in Alberta, British Columbia and Nova Scotia. Shareholders of ULCs are liable for the debts and liabilities of the company. For Canadian income tax purposes, ULCs are considered corporations and are subject to Canadian income taxation. However, for US tax purposes ULCs may be considered “flow-through entities” (i.e., the ULC is disregarded and the earnings of the ULC are flowed through to the ultimate owners of the ULC).  This tax treatment may be useful since the income of the ULC may be consolidated with that of its US parent for US tax purposes.  This may be more tax efficient.

Another example of a hybrid entity is a limited liability company (LLC).  An LLC is a type of entity that is offered in the US, and for US tax purposes, is a flow through entity.  Again, the earnings of the LLC are flowed through to the ultimate owners of the LLC for US tax purposes.  On the other hand, for Canadian income tax purposes, an LLC is considered a corporation and is subject to Canadian income taxation if it carries on business in Canada.  This is definitely a factor that American businesses need to consider if they want to do business in Canada through an LLC.

Hybrid entities certainly have a place in devising tax-efficient business structures, especially when Americans are considering doing business in Canada.  However, there should be careful consideration of the tax consequences if these vehicles are used as tax treaties may provide for restricted benefits for these types of entities.

The author would like to thank Joe Bricker, articling student, for his assistance in preparing this legal update.

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