Canada: Acquiring Canadian Businesses: Tax Considerations For Foreign Investors

Tax efficiency is a key element in any successful cross-border investment. In acquiring or investing in a Canadian business, finding a tax-efficient transaction structure and working through the tax consequences of potential financing arrangements are critical steps. This two-part series examines some of the tax issues that typically influence decisions about how to structure and finance acquisitions of, or investments in, Canadian businesses. In this first installment, we look at how tax-efficiency considerations can affect deal structures.

Part 1: General structuring considerations where a non-resident acquires a Canadian business

a) Asset or share purchase?

  • All else being equal, a non-resident purchaser will usually prefer to buy assets, while a vendor will generally favour a share sale.
  • A purchaser will prefer an asset acquisition because a purchaser that acquires assets will get a step-up in the cost base of those assets, which should (i) increase the deductions that are available to the purchaser in respect of depreciable assets (including goodwill) and (ii) reduce its gains should it subsequently sell any of the assets.
  • Vendors of Canadian businesses typically prefer to sell shares because individual shareholders may be able to take advantage of Canada's lifetime capital gains exemption (a one-time exemption of approximately $800,000 that can be claimed by individual shareholders, including where they hold shares through a family trust, on the sale of certain Canadian company shares). Transactions can be structured as a hybrid share/asset sale so that vendors sell enough shares to claim the exemption, while the purchaser buys the assets directly and gets the benefits of an asset purchase.
  • While vendors will typically have reasons for preferring a share sale, the cost to them of proceeding by way of an asset sale may not be very significant and is often less than the value of an asset sale to the purchaser. In fact, in many cases, an asset sale currently provides a significant tax deferral advantage to vendors (although recent legislative changes proposed in the federal budget would significantly reduce this deferral opportunity after 2016). In view of this, the economically efficient answer will often be to structure transactions as an asset sale or a hybrid share and asset sale while, if appropriate, increasing the purchase price to compensate the vendor for any incremental tax as a result of the change in structure.
  • When the purchaser is a non-resident, additional factors may come into play. Generally speaking, in the case of a non-resident purchaser, an asset sale will provide greater flexibility from a structuring perspective. As discussed below, a non-resident purchaser may prefer not to hold the assets in a Canadian corporation for either Canadian or non-Canadian tax reasons. Similarly, a non-resident purchaser may prefer to acquire certain assets using a Canadian corporation and certain assets using a non-resident entity. If the non-resident purchaser acquires shares, it may be impossible to take the non-Canadian assets out of the Canadian corporation post-closing without triggering significant Canadian tax. Therefore, in cross-border acquisitions, there is even greater incentive to structure the deal as an asset sale than in domestic acquisitions.

b) Asset purchase: branch or subsidiary?

  • A non-resident acquiring assets of a Canadian business may do so directly through a branch or through a subsidiary, which could be a regular Canadian corporation or a Canadian "unlimited liability corporation" (ULC). The decision of which type of entity to use will be based largely on non-Canadian considerations, including U.S. or other foreign tax implications.

    • Branch option: A non-resident that carries on business in Canada is subject to Canadian income tax (subject to an exception where a tax treaty applies to the non-resident, and the non-resident has no "permanent establishment" in Canada). Generally, a non-resident carrying on business in Canada through a branch will compute its income and pay tax in the same manner and at the same rates as if it were a Canadian resident. In addition, the non-resident will pay "branch tax" on any profits not re-invested in Canada. This branch tax is intended to mirror the dividend withholding tax that would be paid on dividends from a Canadian corporation to the same non-resident.
    • Subsidiary option: From a Canadian income tax perspective ordinary Canadian corporations and ULCs are treated identically. Nova Scotia, British Columbia and Alberta have ULC legislation. However, U.S. investors may prefer to use a ULC because ULCs may be treated as disregarded entities for U.S. tax purposes. Special "anti-hybrid" rules in the Canada-U.S. Tax Treaty apply to hybrid entities like ULCs. Certain steps need to be taken in order to access certain benefits under the Canada-U.S. Tax Treaty, and it may not be possible to access certain benefits (particularly if the shareholder of the ULC is a U.S. LLC). The anti-hybridity rules should be considered when deciding whether to use a ULC. Also, due to the fact that US corporate tax rates are generally higher in the U.S. than in Canada, there may be tax deferral advantages of using a regular (non-ULC) Canadian corporation that outweigh the other benefits of using a ULC.
  • Non-resident acquirors will typically prefer to acquire Canadian assets through a subsidiary as doing so is usually cleaner from an administrative and compliance perspective. However, some investors may prefer a branch. One significant consideration is whether the non-resident expects to sell the Canadian business in the future. If it does, acquiring through a Canadian subsidiary may be preferable since non-residents are not subject to Canadian tax on the sale of shares unless the shares are "taxable Canadian property,[1] whereas a non-resident would generally be subject to Canadian tax on the sale of a branch. It may be possible however, to incorporate the branch immediately before the sale to avoid Canadian tax on the sale where the owner of the branch is resident in a jurisdiction that has a tax treaty with Canada.

c) Share purchase:

  • Acquisition company: Typically a non-resident investor acquiring shares of a Canadian company will benefit from making the acquisition through a Canadian acquisition company. The following considerations are significant:

    • Generally speaking, a Canadian corporation can return paid-up capital (PUC) without any non-resident withholding tax. PUC is generally a corporation's stated capital for corporate purposes, subject to specific adjustments and limitations in the Income Tax Act (the ITA) and generally represents amounts contributed to the corporation in exchange for shares. PUC is determined on a class-by-class basis. Accordingly, if a non-resident buys shares from a shareholder, the PUC of the acquired shares will be the historical PUC of the shares, notwithstanding that this amount is likely less than the amount the non-resident will have paid to acquire the shares.
    • To make sure that the non-resident has full PUC and can get all of its investment back without any Canadian withholding tax, a new Canadian acquisition corporation can be set up. The non-resident will subscribe for shares of the acquisition company, and will have cross-border PUC equal to the full amount contributed for the shares. The acquisition company will then acquire the target shares. The acquisition company and target can be amalgamated post-closing (which results in both corporations continuing as a new amalgamated or combined entity).[2]If no amalgamation occurs, going forward the target should be able to pay dividends to the Canadian acquisition company without triggering tax because generally dividends between Canadian corporations are not subject to tax (subject to several exceptions). Going forward, the Canadian company can return paid-up capital to the non-resident in an amount equal to the non-resident's investment without attracting any Canadian withholding tax.
  • Rollovers and exchangeable shares: If a purchaser acquires a Canadian business for consideration that includes issuing its own shares, it will usually be important to the vendor that it obtains a rollover in respect of the share portion of the consideration. In the case of a non-resident acquiror, achieving this result for the vendor is complicated by the fact that the ITA provides for a rollover on share exchanges only if the vendor receives shares of a Canadian corporation. A common (albeit complicated) workaround that generally preserves a rollover for Canadian tax purposes is an "exchangeable share" structure. Generally, this requires the Canadian vendor to accept payment (or partial payment) in shares of a Canadian corporation that are exchangeable for shares of the non-resident purchaser. Exchangeable shares are intended to be the economic equivalent of the purchaser shares, e.g. they typically have a dividend entitlement that mirror dividends paid on the purchaser's shares. By using exchangeable shares, the Canadian vendor will typically be able to defer payment of Canadian tax until such time as those shares are exchanged for the non-resident purchaser's shares (as would happen, for example, prior to a subsequent sale). There are a number of corporate and tax points to consider with respect to an exchangeable share structure, but in many cases such a structure can be implemented to the satisfaction of all sides.
  • Bump: If a non-resident acquires shares of a Canadian corporation and wishes to take certain assets out of the target post-closing it may be possible to do so on a tax-free basis if the purchaser can "bump" the cost base of the assets in the target on the acquisition. This "bump" in cost base is only available with respect to non-depreciable capital assets, such as land and shares (therefore it cannot be used to take goodwill or most other operating assets out of a corporation). Often when a non-resident acquires a Canadian target with a foreign subsidiary the non-resident will benefit from bumping the shares of the foreign subsidiary and distributing them out of the target so that they are no longer held by the Canadian company. Determining the availability of the "bump" is very complicated and fact-dependent and there are a number of limitations on when the bump can be used.

Cross-border transactions involve a number of tax considerations and planning opportunities. It is important to consider all of the facts related to the status and business of the target and the purchaser in order to find the most efficient structure to achieve everyone's commercial objectives. Another important and related piece of the puzzle is the financing of the acquisition. Financing considerations will be discussed in Part 2.


[1] Generally speaking, shares will be "taxable Canadian property" where they derive more than half of their value from real property located in Canada or certain resource properties. Shares may also be deemed to be "taxable Canadian property" in certain situations where they are acquired on a rollover basis in consideration for other property that is "taxable Canadian property".

[2] As will be discussed in Part 2 of this article, an amalgamation may also make sense in order to push debt down to the operating entity in order to benefit from interest deductions.

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.