from the EIFEL rules. A limited exemption may also be available for Canadian resident entities that, in general terms, have no material non-Canadian assets or activities and have no material (25% or greater) non-Canadian shareholders. – EIFEL rules permit Canadian members of a group that prepares audited consolidated financial statements to elect to be subject to a limit based on the overall third-party leverage ratio of the group, which may be favorable where the overall leverage ratio of the group exceeds the ordinary 30% limit. – EIFEL rules only apply after the thin-capitalization rules. Consequently, any amounts for which a deduction is denied by application of the thin capitalization rules will be excluded from a taxpayer’s interest and financing expenses for the purposes of the EIFEL limitation. – Anti-hybrid rules target financing arrangements that result in a deduction in Canada without a corresponding income inclusion in another jurisdiction, or a double deduction in Canada and another jurisdiction, as a result of the hybrid nature of an instrument or entity. For example, an interest deduction to a Canadian corporation on interest paid to a controlling shareholder may be denied where the shareholder treats the interest as a dividend as opposed to interest. Interest that is not deductible under the anti-hybrid rules may be treated as a dividend for withholding tax purposes. – If the Canadian target derives significant value (generally more than 75%) from interests in foreign subsidiaries or other foreign corporations, a Canadian Bidco that is controlled by a nonresident person or group will be subject to additional restrictions under the “foreign affiliate dumping” rules intended to prevent “debt-dumping” into the Canadian corporate group or the indirect extraction of Canadian group surpluses. > Where these rules apply, they can result in a reduction of cross-border capital or a deemed dividend subject to withholding tax. – The foreign affiliate dumping rules will also apply to any Canadian corporation that is controlled by a non-resident person or group and invests in foreign subsidiaries. Extremely careful planning is required for both the initial capitalization of Bidco and any additional post-acquisition funding or expansion of foreign operations. > Because of these considerations, foreign acquirors will often want to extract non-Canadian subsidiaries from a Canadian target immediately after acquisition, which may be facilitated by a “bump” transaction (described below). GLOBAL MINIMUM TAX ACT – Canada’s Global Minimum Tax Act imposes a 15% global minimum effective tax rate on large multinational enterprise groups with annual consolidated revenues of €750 million or more, through a domestic qualified minimum top-up tax and an income inclusion rule.
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Canadian Mergers & Acquisitions
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