Canada: US-Canada Cross-Border M&A


  • US is Canada's largest trading partner
  • Canada is the second largest exporter to the US (after China)
  • Canada's economy is highly interconnected with that of the US
  • substantial drop in Canadian dollar creates new acquisition opportunities
  • resource sector suffering due to drop in commodity prices
  • manufacturing in southern Ontario suffering due to auto sector issues, recent high dollar, high labour costs
  • the worst for southern Ontario and other manufacturing may still be 2 or 3 quarters away
  • banks and other financial players in good shape but credit markets are tight
  • many fresh opportunities for acquisitions


  1. Foreign Ownership Review

    • the Investment Canada Act requires a non-resident buyer to demonstrate a "net benefit to Canada" where the non-resident acquires control of a business in Canada (even one held by another non-resident) with asset values in excess of C$312 million (soon to be C$600 million)
    • there are significantly lower thresholds (as low as $5 million) and much more stringent review for the following "protected areas": (i) transportation; (ii) financial services; (iii) uranium production/ownership; and (iv) "cultural businesses" which include (A) publishing or distributing books, newspapers, or magazines; (B) producing, distributing or exhibiting films or music; and (C) broadcasting
    • industry-specific legislation imposes significant additional restrictions on level of ownership and control that may be exercised by non-residents of Canadian broadcasting and telecommunications businesses
    • complex structures are often used for bifurcating equity ownership from voting control, and operational control from broader ownership decisions, to satisfy applicable ownership and control requirements
    • the application (or risk of application) of these rules to a transaction can have a substantive impact on what the parties can and cannot do, distorting what a deal would otherwise look like absent these rules
    • Canadian sellers in protected industries will often use these rules to their advantage in negotiating with US buyers/partners
    • even a small cultural or protected business nestled in an otherwise unprotected much larger business can impact the entire transaction
    • to permit the main transaction to proceed in a timely manner and without undue execution risk where protected business form only a small part of the target, the protected business will often be spun out (which often can only be done on a taxable basis) to be dealt with differently, with different ownership and management and control, or to not be sold at all
    • the process for securing government approval for the purchase of a protected business can be very time consuming and unpredictable - a buyer must negotiate and agree with regulators on such matters as commitments for minimum levels of Canadian employment following the acquisition, a Canadian head office and Canadian operational control for the protected business, as well as other commitments which cannot easily be predicted and are not subject to any well defined set of rules
    • Canada has often been criticized for these very restrictive and unpredictable rules (among the most onerous in the world according to some commentators), but these rules continue to receive broad political support in Canada, including from those very industries which are protected under these rules

  2. Competition Act (Merger) Review

    • transactions are reviewable only if both (i) target has (A) assets in Canada of C$70 million or (B) gross sales in or from Canada of C$70 million; and (ii) buyer and target and all of their affiliates have, in aggregate, (A) assets in Canada of over C$400 million or (B) sales in or from Canada of over C$400 million
    • analysis is based on most recent financial statements and no need to conduct an "audit"
    • safe harbour carve-out if acquiring less than 25% of a private company or less than 20% of a public company
    • review process (timetables, information required, filing fee of C$50,000) and substantive considerations very similar to the US (which is how it is designed)
    • vast majority of transactions raise no substantive competition law issues
    • recent changes strengthening oversight of agreements between competitors (e.g. joint ventures, strategic alliances, teaming arrangements) could become a major new issue in due diligence or following an acquisition


  • significant differences from the US and generally much more favourable to employees and unions
  • it is generally not possible to void (or avoid) an existing collective agreement, even with an asset sale, and even if the sale is proceeding pursuant to a bankruptcy or other restructuring
  • except for termination for cause, employees have broad statutory and common law rights to notice of termination or pay in lieu of notice – the concept of employment at will does not exist in Canada
  • it is virtually impossible to terminate for cause except for obvious malfeasance or repeated documented refusal to follow reasonable instructions
  • employment standards legislation in each province impose different statutory minimum notice requirements (up to 8 weeks) which can increase significantly for mass terminations of large numbers of workers (up to 26 weeks)
  • much more significant than the statutory rights is the common law right to notice or pay in lieu of notice which can average 1 month for each year of service and, depending on various factors such as age and seniority, can be as high as 24 months
  • common law notice rights are a significant hidden liability which is (a) inherited on a share sale; (b) triggered on an asset sale, but can be mitigated by offering employment on substantially the same terms
  • US buyers negotiating LOIs without the involvement of Canadian advisers will often not address this issue, which then becomes a problem for the purchase agreement, especially when terminations of key employees with significant seniority are planned or likely following the acquisition
  • e.g., a 50 year old CFO with 20 years seniority earning $1 million annually would be entitled to something in the range of 15-18 months or $1.250 – 1.5 million – a very significant sum for which no one may have budgeted and which does not appear in any financial statement
  • employment contracts can be entered into to eliminate the right to common law notice, but will only be enforceable if the employee obtains independent legal advice and many employees will not in any event sign such contracts without building in a right to notice or pay in lieu of notice
  • the handling of Canadian executives and other employees is a critical issue for US buyers where care must be exercised from the very beginning to understand the legal and cultural differences between Canada and the US on this most sensitive of topics


  1. Overview

    • in-bound planning is in a state of flux because of changes in the recent Fifth Protocol to the Canada-US Tax Treaty
    • changes under the Fifth Protocol to become effective in 2011 intended to block double-dip structures are very broad and will (unintentionally?) deny treaty protection to very popular ULC holding companies such that dividends paid by a ULC to the US will become subject to 25% withholding tax
    • it may be possible to achieve same/similar result as prior to the Fifth Protocol by interposing a Luxembourg SARL
    • Canadian seller will prefer share sale, and US buyer can approximate asset purchase with a ULC (best of both worlds!)
    • US buyer will need a Canadian bidco/holdco (can be the ULC) to preserve paid up capital (initial investment, which can be repatriated at any time free of withholding tax) and push-down acquisition interest expense to the target (there is no consolidation of parent-sub tax returns in Canada)
    • planning is on-going to deal with the imposition in 2011 of 25% withholding tax on payments by ULCs to the US, and some of the possible solutions include: (i) transfer to a Luxembourg SARL or other treaty country; (ii) conversion to a limited liability company, although there may be US tax on this; or (iii) decide to never pay dividends, which works in some cases – some are even hoping for a new protocol that will reverse the Fifth Protocol on this point but there is no serious indication that this could happen (especially in the current political environment in the US and Canada)

  2. 116 Clearance Certificate

    • Canada requires 25% withholding or a clearance certificate on any sale of taxable Canadian property by a non-resident
    • the tax applies even on a sale by one non-resident to another nonresident – i.e., by a US resident seller to a US resident buyer, such that the buyer becomes liable for the seller's Canadian tax liability
    • taxable Canadian property includes (i) real estate; (ii) private company shares; (iii) certain shares of public companies; and (iv) units of partnerships if more than 50% of the FMV of its assets is taxable Canadian property
    • the withholding obligation is imposed on the buyer, so that the buyer will force the seller to obtain a clearance certificate as a condition of closing the deal
    • sellers will often take the position with the buyer that the seller is a resident of Canada, or if not, that the asset is not taxable Canadian property or, if it is, that the sale is exempt from tax under a tax treaty
    • it is possible for the buyer to conduct due diligence to verify that the seller is a resident of Canada, in which case the buyer takes no risk since this part of the test permits a due diligence defence
    • it is often difficult however to verify that the property is not taxable Canadian property since many facts can bear on this issue, and it is even more difficult to verify that that the seller is entitled to treaty protection, and, in either case, there is no due diligence defence – if the information is wrong, the buyer is liable – consequently all buyers will ask for a clearance certificate in such cases
    • the process of applying for clearance certificates from the Canada Revenue Agency (CRA) can be costly and time consuming – the CRA seems to be always behind and needs to review a significant amount of information to reach a decision
    • the use of look-through entities up the chain in the US imposes additional serious hardships since each member of a partnership or LLC has to separately apply for clearance, looking through each tier of flow-through entities up the chain all the way to the top – with many private equity funds, this could involve hundreds or even thousands of ultimate applicants for the 116 clearance certificate, a clearly untenable result
    • recent amendments were introduced to attempt to alleviate this compliance burden by permitting a transaction to proceed based on due diligence without the need for an actual clearance certificate – however if they buyer does so, the buyer takes the risk if the fiscal authorities disagree since there is no due diligence defence – hence all careful buyers will continue to insist on a clearance certificate on any sale by a non-resident (this due diligence procedure can however be used for non-arm's length transactions)
    • "blocker" entities which are themselves entitled to treaty benefits are often used to avoid a look-through behind a flow-through such as a private equity fund structure
    • escrow arrangements are often used where the 25% tax is deposited with an escrow agent while the CRA works its way through the clearance certificate process for many months after the deal has closed – however such an arrangement will generally only work where both parties are relatively comfortable what the result will be – when the clearance certificate is issued, the escrow agent pays the money to the seller
    • failure to plan for the 116 clearance certificate procedure when the investment is made can lead to insurmountable obstacles at the time of disposition

  3. Exchangeable Shares

    • Canada does not permit a tax-deferred exchange of Canadian shares for the shares of a US buyer (private or public) creating cash flow and other problems for deals of this type
    • amendments to domestic law to provide for non-recognition treatment have often been promised, including in several federal budgets going back to 2000, but more recently the government has said such relief is no longer a priority
    • equivalent non-recognition treatment can be engineered by allowing the shareholders of the Canadian company to exchange their shares under domestic non-recognition provisions for shares in another Canadian company (Newco) that are "economically equivalent" to the shares of the US buyer
    • Newco is set up by the US buyer for the specific purpose of providing economic equivalent treatment to the Canadian shareholders of the target
    • US buyer enters into an agreement to support Newco to permit Newco to make the necessary payments to its shareholders
    • a voting trust can be set up with an independent trustee to which the US buyer grants the right to vote a proportional number of shares in the US buyer represented by the ownership of the Canadian shareholders in Newco
    • on the ultimate sale, Newco will purchase the exchangeable shares in exchange for shares of the US company and the Canadian shareholders will sell their shares in the US company to the new buyer – the net tax triggered works out to the same as if the Canadian shareholders had held the shares directly all along and there is now cash flow from which to pay the tax
    • "exchangeable share" structures can be hard to engineer and there are a number of Canadian and US tax issues that often require considerable effort to overcome – on the other hand they are often essential to getting a deal done


  • business and legal considerations substantially the same as in the US
  • each common-law province has enacted personal property security legislation similar to the US UCC (there are differences in Quebec, but even in Quebec the same result can obtain)
  • many domestic banks, foreign banks and foreign and domestic lenders provide financing with the same level/type of service and security packages as are commonplace in the US
  • syndicates for Canadian acquisition financing often include US and Canadian lenders and loan agreements for Canadian loans are often subject to the laws of the State of New York (or the laws of the Province of Ontario, which are virtually the same as those of the State of New York in all material respects and are acceptable to many US-led syndicates)
  • the security documentation itself will look different (and in Quebec very different) but legal opinions will look very familiar, and since security packages sit under the credit agreement there is typically not much that rises to the deal level from these documents
  • cross-border down-stream guarantees by US parents of their Canadian subs are a common feature of much cross-border lending (subject to certain US tax considerations for the US parent)
  • a typical structure requires the Canadian bidco sub of the US buyer to amalgamate with the target on closing to push down to the sub the acquisition debt and related interest expense and other financing costs – such amalgamations are tax free and will automatically transfer the credit agreement and security package to the resulting company, which, by law, will be the same as a fusion of the two predecessor companies to form one new company in which the two predecessors continue to exist – hence all obligations of bidco under statute or contract, in law or in equity, are, by operation of law, automatically assumed by and become obligations of the continuing corporation
  • Canada has, effective January 1, 2008, eliminated withholding tax on interest (which is not dependent on use) paid to arm's length non-resident lenders and this has opened up new sources of US lending which was previously not competitive in Canada because of the withholding tax on interest, although our experience to date has been that revolvers, equipment finance, sale-leaseback and similar type arrangements are not being done cross-border, probably for lender internal operational reasons
  • Bank Act (Canada) regulations are generally not an impediment to US lenders, nor are Canadian domestic tax considerations, provided such US lenders do not attempt to set up a branch and take deposits in Canada
  • it is well settled law that a breach of the Bank Act does not result in any security being unenforceable
  • US lenders will not be subject to tax in Canada unless they carry on business in Canada through a permanent establishment
  • it is well settled law that US lenders entering Canada to conduct due diligence does not constitute carrying on business in Canada, although it is preferable that contracts be negotiated and concluded outside of Canada
  • generally speaking, US buyers who have established relationships with US lenders will easily be able to work with their US lenders on their Canadian acquisition in much the same way that they do in the US if that is what they wish to do


  1. Incorporation – Ontario Or Federal

    • Ontario Business Corporations Act (OBCA) are often preferred – in this regard, Ontario could be called the "Delaware of the North"
    • OBCA companies are governed by a well developed body of law and are easy to reorganize to facilitate tax and other acquisition needs – I personally prefer them for this reason
    • OBCA companies need extra-provincial licences to carry on business outside Ontario but such licenses are inexpensive and routinely granted
    • (Federal) Canada Business Corporations Act (CBCA) companies are finding favour because there is no need for extra-provincial registrations – a CBCA company can carry on business anywhere across Canada
    • OBCA or CBCA companies can indemnity their directors and can fund defence costs pending resolution of claims
    • it is very common to have indemnity agreements with directors to avoid uncertainty/changes in corporate policy/by-laws for current or former directors, and it is also common for the US parent to join in providing the indemnity
    • a unanimous shareholder agreement can be entered into to strip the board of its power and vest such power with the shareholders and relieve the board of liability to that extent except for certain statutory strict liability such as for environmental matters
    • directors are liable for withholding taxes, including on constructive cross-border payments, including adjustments resulting from a transfer price audit occurring many years after the fact, and such liability can become problematic if the company gets in trouble and cannot pay

  2. Unlimited Liability Companies (ULCs)

    • ULCs which satisfy US tax requirements for pass through treatment can be set up in Nova Scotia, British Columbia or Alberta and (subject to extra-provincial licensing) carry on business anywhere in Canada
    • domestically in Canada, a ULC is just another "corporate body", with all the powers of any other corporation, subject to tax just like any other corporation (i.e. it is like a US C-Corp)
    • there are however two significant differences (a) the members/shareholders of a ULC can be liable for losses which can flow through on a liquidation/wind-up of the ULC (hence, why these are "unlimited liability entities"); and (b) reorganizations of ULCs required in connection with tax planning, financings and acquisitions are very cumbersome, although less so in Alberta and British Columbia than in Nova Scotia
    • a blocker sitting above the ULC in the US is always recommended to block any liability flow through on the liquidation of the ULC and this needs to be done when the ULC is established to avoid tax and insolvency issues which will arise if an attempt is made to insert a blocker when insolvency issues begin to arise
    • British Columbia and Nova Scotia ULCs do not require any Canadian resident directors, which is often very desirable
    • cross-border tax issues relating to existing and new ULCs are discussed above under tax planning

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.

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