Canada: Private Equity Investing in Canada: Avoiding the Pitfalls

While the Canadian market is increasingly seen as an attractive one for U.S. private equity investors, real success depends on identifying the substantive differences between the two regimes and structuring the investment accordingly.

American private equity funds have become major players in the Canadian marketplace and have figured prominently in a number of recent large transactions north of the border.

To name a few examples: Bain Capital, LLC, along with the Beaudoin family and the Caisse de dépôt et placement du Québec, formed a consortium which, in December 2003, acquired the recreational products division of Bombardier Inc. for C$960 million. This summer, another investor group led by Hicks, Muse, Tate & Furst acquired Persona Inc., Canada’s sixth largest cable television operator, for C$400 million.

And, in a transaction that represented 2003’s largest Canadian IPO, a group of investors led by Kohlberg Kravis Roberts & Co. formed an income fund to monetize their interest in the Yellow Pages telephone directories business, which they had acquired from Bell Canada less than a year earlier. The Yellow Pages Income Fund completed two offerings in a span of less than four months for total proceeds of C$2.5 billion.

The Income Fund Phenomenon

The Yellow Pages transaction illustrates the importance of income funds (also known as "income trusts") in the Canadian corporate landscape. Income funds (which until very recently were unique to Canada) are typically formed to acquire income-producing businesses with a history of stable earnings and low ongoing capital needs. Their primary focus is on maintaining the earnings flow necessary to protect unit distributions. Typically, management is constrained from making significant acquisitions or otherwise fundamentally altering the fund’s core business.

When structured properly, an income fund acts as a flow-through vehicle for tax purposes; income taxes are paid at the unit holder level rather than at the level of the fund itself. In part because of this tax efficiency, converting a business into an income fund frequently results in higher multiples than a plain-vanilla IPO.

The rise in popularity of income funds has implications for U.S. private equity investors looking at the Canadian market. When a company is seeking to raise capital and is facing a choice between the public markets and sources of private equity, the income fund structure can represent formidable competition to the private equity alternative. There is a corollary however: in evaluating a potential acquisition, a private equity investor should give thought to whether conversion to an income fund would be a viable option for achieving liquidity. As the KKR/Yellow Pages transaction vividly demonstrates, in appropriate circumstances the income fund structure can present an attractive exit vehicle.

Investment Structure Issues

Apart from the ubiquity of income funds, there are other significant differences between the U.S. and Canada which private equity investors need to be familiar with when participating in Canadian transactions.

In particular, limited liability companies (LLCs), which are commonly used as private equity investment vehicles in the U.S., are not the vehicle of choice for cross-border investments into Canada. This is because LLCs are not considered "residents of the U.S." by the Canadian taxation authorities for purposes of the Canada-U.S. tax treaty. As a result, they are not entitled to relief under the treaty from the taxation in Canada of capital gains received on liquidation of a Canadian investment, nor are they eligible for the reduced rate of withholding tax that would otherwise apply to interest and dividend payments from a Canadian entity.

Another feature of Canadian tax law is its preferential treatment of "Canadian controlled private corporations," commonly referred to as CCPCs. Corporations that qualify as CCPCs are entitled to lower corporate tax rates, greater access to investment tax credits and more favorable tax treatment for employee stock options.

Acquisition by a U.S. private equity investor of a controlling equity interest in a corporation will disqualify the corporation from CCPC status. Even a minority investment can have the same result if, for example, the U.S. investor has contractual rights which give it de facto control of the corporation or has a right to acquire a controlling equity position at a future date. The rules in this area are complex and there is often a tension between the desire on the part of a U.S. equity investor for effective control and the desire to preserve the tax benefits of CCPC status where possible.

Canadian Sellers and Market Receptive

None of the differences between the U.S. and Canadian regimes is insurmountable. The key to success is to recognize the differences up front and structure the investment accordingly. With this in mind, the Canadian market can be an attractive one for U.S. private equity investors: Canadian deal documentation looks quite similar to its U.S. counterpart, Canadian sellers are generally receptive to private equity purchasers and the Canadian capital markets provide readily accessible paths to liquidity.

Stephen Sigurdson is managing partner in Osler’s New York office and specializes in cross-border transactions. Geoff Taber is based in Toronto, where he practises corporate finance with an emphasis on technology and life sciences companies and the venture capital funds that finance them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.