Acquirer Considerations
CANADIAN BIDCO A foreign acquirer will typically establish a Canadian company (Bidco) to effect a Canadian acquisition for the following reasons: > To permit the deduction of interest and other financing expenses of the acquisition against target income; > To allow the repatriation of funds from Canada to the foreign parent free of Canadian withholding tax; or > To accommodate a “bump” or “step-up” of the tax cost of the target’s non-depreciable capital assets under Canada’s tax bump rules where available. – In Canada there is no tax consolidation within a corporate group. For financing expenses to be deductible against the target’s earnings, Bidco should be the borrower and it should merge with the target on or after the acquisition. Further structuring will often be required when the target was a holding company, with taxable income being earned in lower-tier entities. – Paid-up capital generally represents the original subscription price paid for shares. A Canadian corporation that is not a public corporation may return paid-up capital to a non-resident shareholder free of the Canadian withholding tax that applies to dividend payments by passing a shareholder resolution. A public corporation may also be able to make tax-free return of capital payments in certain limited circumstances. There is no requirement that earnings be distributed before paid-up capital is returned. Typically, Bidco’s paid-up capital will exceed the target’s historical paid-up capital, allowing for greater returns of capital. Foreign tax considerations will be relevant in considering whether this provides overall tax savings. – In qualifying circumstances, a merger of Bidco and the target will permit the tax cost of the target’s qualifying non-depreciable capital property (such as shares of subsidiaries and land, but not buildings or resource properties) to be bumped or stepped up to fair market value at the time control is acquired. > This will allow greater flexibility in dealing with assets in post-acquisition planning (see Bump and Associated Planning below). FINANCING CONSIDERATIONS – There is generally no Canadian withholding tax on interest paid to non-resident lenders that deal at arm’s length with the borrower for tax purposes, provided that the interest is not participating interest, does not exceed limits under “thin capitalization” rules and the lending is not part of a hybrid financing arrangement or a back-to-back arrangement with a non-resident that does not deal at arm’s length with the Canadian borrower.
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Canadian Mergers & Acquisitions
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