terms, have no material non-Canadian assets or activities and have no material (25% or greater) shareholders. – While the EIFEL rules conceptually overlap with the the thin capitalization rules, as described above, the thin capitalization rules apply first in priority to the EIFEL 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. – 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 corporation will be subject to additional restrictions under the “foreign affiliate dumping” rules intended to prevent “debt-dumping” into the Canadian corporate group or the synthetic extraction of Canadian group surpluses. > Where they apply, these rules 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 corporation that 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. BUMP AND ASSOCIATED PLANNING – Following the acquisition of control and merger of Bidco and the target, it may be possible to step up (or bump) the tax cost of qualifying non-depreciable capital properties such as shares and land owned by the target at the time control is acquired. – Bidco must acquire 100% of the target to undertake a bump (i.e., control alone is not sufficient). – A bump is particularly desirable when target assets are to be sold or when target assets include shares of foreign subsidiaries that are to be transferred within the purchaser’s corporate group to optimize the group structure. > The foreign affiliate dumping rules referred to above may place a premium on transferring the target’s foreign subsidiaries out of Canada to a location elsewhere in the purchaser group. – The bump provisions contain extensive rules to prevent the bump from benefiting selling shareholders of the target. These provisions impose significant limitations on transferring target assets or property that derives its value in whole or in part from target assets to selling target shareholders (individually or as a group). – The amount of “bump room” available is largely dependent on the cost of target shares to Bidco. When a rollover is provided to selling shareholders to defer their tax on sale, the amount of bump room will be reduced. > However, the bump can be applied selectively to target assets, meaning that a fully taxable purchase is often not necessary to accommodate selective bump planning.
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Canadian Mergers & Acquisitions
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