Topic: Tax

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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

Legal update: branches of a corporation are one and the same

In a recent unanimous decision of the full bench in 1068754 Alberta Ltd v Quebec (Agence du revenue) (1068754 Alberta Ltd.), the Supreme Court of Canada has upheld Quebec tax officials’ authority to demand information from a national bank that operates in multiple provinces including Quebec and Alberta, thereby asserting that different branches of the same corporation are still one legal person.

Unlike other provinces, Quebec collects its own income tax and the requirement to pay taxes depends on the residency of a person (legal or natural). Determining residency can be a complex legal analysis and requires a … 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

Tax competition is coming – review of the Federal Fall Economic Update

On November 20, 2018, the federal Government of Canada released their Fall Economic Update – a review of the country’s finances and economic health that addresses trends and changes taking place in Canada and the world since the federal Budget in the spring.

Of particular note in 2018 was the anticipated response to the U.S. tax reform enacted by the Trump administration. In addition to slashing corporate tax rates from approximately 35% to approximately 27% (including state taxes) – an amount that puts pressure on Canada’s corporate tax rates, which vary between 26.5% and 31% – the U.S. tax reform … Continue Reading

Treaty won, battle lost? Reviewing developments in international tax law

No one would ever suggest international tax law is simple, but with Canada’s impending ratification of the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI“), a new layer of complexity has been added when determining whether a taxpayer is eligible to receive a particular treaty benefit. The recent decision in Alta Energy Luxembourg S.a.r.l v The Queen[1](“Alta Energy“) might be a new high-water mark for taxpayers in treaty interpretation, but it may also be their last win.

The decision in Alta Energy considered the … Continue Reading

Excess cash, excess tax – what’s on your balance sheet?

Canadian federal income tax law provides numerous benefits to companies that engage in an “active business”. Whether a particular endeavour undertaken is an “active business” is, of course, a question of fact and depends on individual circumstances. Some scenarios are clearly those of an “active business”, such as the case of manufacturing and production, retail, mining, sales and shipping and receiving. Others are clearly more of a passive nature, such as merely owning real estate and collecting rent on the property, without any substantive management. Many could be considered somewhere in between.

When a company is in fact engaged in … 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.
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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

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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

Inversion control: U.S. Treasury announces new rules affecting cross-border transactions

In September 2014 we reported on the practice of “tax inversions”, cross-border transactions in which the resulting entity may be headquartered in another country for tax purposes. A number of recent transactions between the U.S. and Canada have been seen as inversions by some. On April 4, the U.S. Department of the Treasury and the Internal Revenue Service announced new temporary and proposed regulations that may significantly impact cross-border transactions involving U.S. companies.

As a result of previous action by the Treasury, companies in a cross-border deal can avoid triggering the tax code’s inversion rules when the U.S. company’s … 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

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