Tag archives: tax

Digital Taxation – Novel Considerations in M&A Transactions

Digital taxes have become a subject of significant debate in recent years. Following allegations that tech giants have paid very little tax anywhere in the world, some countries have moved to impose new taxes on profits derived from digital services provided by multinational enterprises on a jurisdiction-specific basis. For instance, France recently adopted a digital services tax of 3% per annum applicable to the portion of revenue that digital companies derive in France. Similarly, as of April 1, 2020, the UK imposed a 2% per annum tax on the revenue of search engines, social media services and online marketplaces that … Continue Reading

Shareholder Loans: The Interplay of 80.4, 15(2) and 20(1)(j) of the Income Tax Act

Subject to certain exceptions, where a shareholder (other than a corporation resident in Canada) of a corporation is indebted to the corporation (a “Shareholder Loan”), the shareholder is deemed by subsection 80.4(2) to receive an interest benefit to the extent that the notional interest on the Shareholder Loan, calculated at the prescribed rate, exceeds the interest actually owing and paid. However, for a Shareholder Loan that was included in computing the income of a person under Part I of the Income Tax Act (for example under subsection 15(2)), paragraph 80.4(3)(b) provides that no subsection 80.4(2) interest benefit is … Continue Reading

Non-resident employees: withhold on worldwide income?

ITA regulation 102 requires employers to withhold tax on remuneration paid to non-resident employees who are employed in Canada. This requirement can be avoided by seeking a treaty-based waiver (regulation 102 waiver) or certification as a qualifying non-resident employer. However, often there is not sufficient time to do this before the employment is to begin, or there is a lack of awareness of the rules. Where the employer must withhold tax, should the amount be based on the non-resident employee’s Canadian income or worldwide income? Clarification from the CRA would be appreciated.

Specifically, regulation 102 imposes withholding on “any payment … Continue Reading

ILP, SLFI, HST – tax acronyms every fund should know

When we structure private equity funds, whether through a mutual fund trust, limited partnership or certain other entities, considerable time is spent on the income tax issues. We examine the deductibility of the management fees. We consider strategies for delivering the carried interest to employees in a tax-efficient way. We take steps to keep the flow-through nature of the mutual fund trust and prevent it from being a SIFT trust. We draft detailed securities tax disclosure dealing with allocation and distribution of earnings to unitholders, the resulting impact on adjusted cost base and the tax consequences of redemption of units, … Continue Reading

The deemed dividend dilemma: structuring your cross-border credit support

We frequently act as Canadian counsel to lenders and borrowers in cross-border transactions where credit support is provided to a US parent company by one or more of its Canadian subsidiaries. In structuring the deal, a considerable amount of time can be spent determining the extent to which the collateral of the Canadian subsidiaries should secured.

The reason for this dilemma is because of section 956 of the US Internal Revenue Code, which creates a deemed dividend on the income of any controlled foreign corporations (CFCs) irrespective of whether or not the dividend is in fact papered … Continue Reading

Investor confidence, disruption risk and US tax reform will continue to spur M&A activity

JP Morgan recently released its 2018 Global M&A Outlook report, predicting that 1) investor confidence from solid GDP growth, 2) disruption risk from technological change, and 3) opportunities from the passing of the US tax reform will drive significant M&A activity in the year ahead.

Investor confidence

In 2017, nine out of ten equity sectors in the US achieved positive returns.  The strong equity performance was driven by several factors, including:

  • strong corporate earnings growth across sectors (apart from the energy sector);
  • historically low interest rates;
  • low unemployment rates and improving GDP growth; and
  • increasing consumer and business confidence.
Continue Reading

Why have a document retention policy?

The current digital age has made it easier for companies to retain an enormous volume of documents – significantly more than a company could have afforded to keep before the advent of electronic record-keeping. In response, companies have sought to upgrade their IT systems to digitize their paper records and to allow for increased storage. These upgrades, however, are inadequate without the adoption of a comprehensive formal policy to guide a company’s record-keeping process.

Why have a document retention policy?

Besides general organization purposes, there are a few other good reasons why a company should adopt a document retention policy:… Continue Reading

Taxation of cryptocurrency: unchartered territory and treacherous waters

With the recent market uproar for blockchain technology and cryptocurrency, the tax question is becoming more and more pertinent. Whether one is trading in cryptocurrency, issuing it in an effort to raise capital, hanging onto it as a long term investment, mining it or using it to access software apps, numerous questions arise.

Answering these questions with any measure of certainty, however, is tough. No legislation has been introduced  and no Canadian case law has yet been decided on cryptocurrency (although one surmises that that won’t be the case for long). The Canada Revenue Agency (CRA) has released … Continue Reading

Will tax reform affect recent spending trends of U.S. companies?

This year’s Wall Street Journal CEO Council Meeting was held from November 13th to 14th. At the meeting, which included discussions of critical issues such as artificial intelligence, cyber security and foreign markets, Gary Cohn, the White House economic advisor, asked the CEOs in attendance whether they believed the proposed reduction in taxes would encourage them to spend more. In response, few CEOs answered in the affirmative. This response is likely representative of the fact that the existing tax rates have not deterred companies from investing. In fact, companies are spending more than before. So far, … Continue Reading

Incoming legislation implements common reporting standards

On July 1, amendments to the Income Tax Act (Canada) implementing international common reporting standards (CRS) will come into force. The CRS regime is intended to facilitate the exchange of taxpayer information between governments. Financial institutions will be required to report financial information about individuals and entities not resident in Canada[1] to the Canada Revenue Agency (CRA), which will in turn share the information with the tax authorities in the individual or entity’s jurisdiction of residence.

Due diligence obligations

Under CRS, financial institutions in Canada will be required to conduct due diligence on all financial … Continue Reading

M&A update: Canadian federal budget 2017 tax measures

Yesterday, Budget 2017 was tabled by the Liberal government. While Budget 2016 contained many significant tax changes, Budget 2017 does not. Despite having indicated in its 2015 election platform and in Budget 2016 that the Liberal government intended to eliminate a number of perceived tax advantages it considered were benefitting wealthy Canadians and not the middle class, the Liberal government deferred dealing with those perceived tax advantages, but indicated that a paper would be delivered in the coming months outlining issues and providing proposed policy changes relating to tax planning strategies being used by private corporations that provide tax advantages … Continue Reading

M&A: the subsection 20(24) election

In a business acquisition transaction, it is not uncommon to find an assumption by the purchaser of the obligations of the vendor to deliver goods or perform services in the future for which the vendor has already received payment. In such a scenario, there are two possible outcomes from a tax perspective, as set out below:

No election made under subsection 20(24) of the Income Tax Act

Typically the purchaser would treat the assumed obligation as part of the consideration for the purchase of the business. Where no election is made, the purchaser would not be able to deduct expenses … Continue Reading

Supreme Court of Canada clarifies law of rectification

Deals often come together very quickly. In all that rush, it’s easy for the parties to forget to think about all of the long term implications of the deal. Perhaps the parties simply didn’t realize that the deal would have certain consequences that frustrated their original intentions. Maybe the parties intended to avoid particular tax consequences but carried out the steps of the transaction in the wrong order. Whatever the issue, the remedy of rectification offers the parties a second chance; a chance to go back and fix their mistakes. Two recent decisions of the Supreme Court of Canada have … Continue Reading

Applicability of the capital gains exemption in M&A

Individuals selling their business often think of using the capital gains exemption to help keep the tax man at bay. Undoubtedly, this tax exemption is a useful tool when an individual is thinking of selling shares in their business, however, there are several conditions that must be satisfied before this exemption applies. The following is a brief overview of those conditions.

For the exemption to apply, the shares to be sold must be “qualified small business corporation shares” (as defined in the Income Tax Act (Canada)). To meet this definition, the corporation in question must be a “small business corporation”, … Continue Reading

Canada’s first post-BEPS tax treaty: implementing the new treaty shopping proposals

Last November, we told you about the new treaty shopping rules proposed by the Organisation for Economic Co-operation and Development (OECD) as part of the final report on Action 6 of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan).

The main proposal in Action 6 was the amendment of the OECD model tax treaty to include “limitation on benefit” provisions. Two types of provisions were proposed: (i) specific provisions (LoB provisions) that limit the availability of treaty benefits to individuals, corporations, and other organizations that meet specific criteria that are … Continue Reading

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 … Continue Reading

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 … Continue Reading

Incoming tax changes may spawn a surge in private company asset sales

red-light-680x220

With fall around the corner and looming tax changes, certain private companies – Canadian-controlled Private Corporations (generally, private corporations that are controlled by Canadian residents, referred to herein as CCPCs) – may begin to feel pressure to quickly start and/or complete asset sale transactions. On March 22, 2016, the federal Finance Minister released the 2016 Federal budget. The budget includes new measures that will impact tax payable on sales of eligible capital property (ECP), such as goodwill and other intangibles.  The impact of these changes will largely be borne by sellers. The date for implementing these measures … Continue Reading

Corporate residency for tax purposes

A corporation that is resident in Canada for Canadian income tax purposes is subject to Canadian income tax on its worldwide income. On the other hand, corporations that are not resident in Canada are only subject to Canadian income tax on their Canadian-source income. Accordingly, residency is an important factor in determining which Canadian income tax regime applies.

Generally, a corporation will be deemed to be a resident in Canada if it has been incorporated in Canada. Absent a deeming provision, a corporation can also be resident in Canada based on common law principles. The common law test for corporate … Continue Reading

M&A in the life sciences sector remains healthy

In December 2015, we reported on the record-setting M&A activity in the life sciences sector in 2015. In a post last month, we also reported on a recent surge in M&A deals in the pharmaceutical industry, including $40 billion worth of deals announced in one day. Now, a recent report by EY suggests that while the flurry of M&A activity may be tapering off, company expectations remain high with respect to future deals in the life sciences industry.

In particular, the report notes that 45% of life sciences executives surveyed are still expecting to pursue acquisitions over the … Continue Reading

Getting the best (asset) deal: tax efficient purchase price allocations

The number one consideration for anyone buying or selling a business is price. But getting the best price is not just about the total cash value. How the purchase price is allocated across the various assets included in the deal has significant implications for the future tax liabilities of both purchasers and sellers. This article discusses some of the major considerations for purchasers and sellers in deciding how to allocate the purchase price in asset purchase agreements, and recent proposed changes to the tax treatment of goodwill which may alter the current allocation preferences of the purchaser and seller.

Inventory

Continue Reading

Update: 2016 Federal Budget – Liberals drop tax proposal for employee stock options

Tuesday marked the release of the new Liberal government’s first budget. The budget, entitled “Growing the Middle Class”, did not contain the anticipated changes to the tax treatment of employee stock options discussed last week on Deal Law Wire. The proposed changes were first announced in the Liberal party’s election platform and would have capped claims for employee stock option deductions by high earners. Federal Finance Minister Bill Morneau indicated yesterday that the proposed changes to employee stock options are no longer in the federal government’s plans. This is good news for Canadian start-ups that voiced concerns that … Continue Reading

Will the 2016 Federal Budget contain anticipated changes to employee stock options?

There has been much speculation about the tax measures to be included in the new federal government’s first budget that will be presented next week, on March 22. Of particular interest to the start-up and technology communities is whether the budget will introduce changes to the tax treatment of employee stock options. The Liberal party’s election campaign promised reform in this area, but contained few details of the proposal.

Current treatment of stock options

An employee stock option grants an employee the right to purchase shares of its employer company at a stated exercise price. Upon exercise of the option, … Continue Reading

Avoiding tax traps: don’t forget about non-competition agreements

Non-competition agreements can be a valuable tool for purchasers who want to protect their investments in new businesses. However, non-competition agreements can have unintended and unexpected tax consequences, particularly to sellers who grant non-competition agreements to purchasers.

The Income Tax Act (Canada) (the Act) contains specific provisions regarding the taxation of “restrictive covenants”, a broadly defined term that includes, among other things, non-competition agreements, regardless of whether such agreements are legally enforceable.

Under section 56.4 of the Act, the portion of the purchase price allocated to the granting of a restrictive covenant (whether by the parties or as a … Continue Reading

LexBlog