In September 2014
we reported on the practice of "tax inversions",
cross-border transactions in which the resulting entity may be
headquartered in another country for tax purposes. A number of
recent transactions between the U.S. and Canada have been seen as
inversions by some. On April 4, the U.S. Department of the Treasury
and the Internal Revenue Service announced new temporary and proposed regulations that
may significantly impact cross-border transactions involving U.S.
As a result of previous action by the Treasury, companies in
a cross-border deal can avoid triggering the tax code's
inversion rules when the U.S. company's value is less than 80%
of the combined group value. In calculating the foreign
parent's value, the new temporary regulations will disregard stock
of the foreign parent attributable to prior acquisitions of U.S.
companies within three years. This means that if the foreign parent
has recently engaged in other cross-border transactions, the new
rules may classify the transaction as an inversion even if the
ownership thresholds are met.
The Treasury also announced proposed regulations to address the
issue of earnings stripping, a practice where companies move
earnings to a jurisdiction with lower corporate tax rates. The
measures taken largely involve reclassifying instruments that would
normally be considered debt. Proposed regulations include:
Limitations on transfers of related-party debt to a low-tax
foreign affiliate by treating the transferred instrument as
Measures to address dividend distributions of debt in which a
U.S. subsidiary borrows cash and pays a cash dividend distribution
to the foreign parent;
Treating as stock instruments that might otherwise be
considered debt if they are issued in connection with transactions
between related corporations that are economically similar to
dividend distributions; and
Rules allowing the IRS to divide a purported debt instrument
into part debt and part stock.
The Treasury and the White House also released the The President's Framework for Business Tax
Reform. A key element of this new framework involves
strengthening the international tax system to discourage profit
shifting. It is clear that the current U.S. administration intends
to introduce further and more permanent rules which will affect
cross-border M&A deals. Companies considering deals involving
U.S. entities will have to consider how to structure their
transactions in light of these new considerations.
The author would like to thank Jacqueline Byers, articling
student, for her assistance in preparing this legal
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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