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.

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.