In our recent McCarthy Tétrault Tax Perspectives tour, speakers from McCarthy Tétrault's National Tax Group led a practical discussion of the evolving legislative and judicial tax landscape in Canada and provided attendees with strategic insights and actionable advice.
The April 2025 tour featured three presentations of particular interest in the current international business climate: (i) select topics in outbound M&A into the United States (US), (ii) corporate migration, and (iii) an update on recent decisions from Canadian federal and provincial courts.
Expanding to the US – Select Topics in Southbound M&A, Drew Morier and Jeremy Ho
Drew Morier and Jeremy Ho began with an update on relevant considerations for Canadian businesses considering an expansion into the US. Key considerations include the following:
1. Choice of Business Vehicle
Canadian businesses expanding into the US generally use a US parent holding entity that is typically a C corporation or other regarded entity, rather than a fiscally transparent LLC. While fiscally transparent LLCs are commonly used in the US, they may be problematic from a Canadian income tax perspective as a result of the LLC's hybrid treatment. For Canadian income tax purposes, an LLC is treated as a corporation, whereas for US income tax purposes, an LLC is, in the absence of a 'check-the-box' election, either disregarded (if it has a single member) or treated as a partnership (if it has multiple members). Accordingly, a Canadian resident holding a member interest in a fiscally transparent LLC may be exposed to having a taxable presence in the US. Moreover, to the extent the LLC earns foreign accrual property income (FAPI) to be included in the Canadian-resident member's income, any US tax paid by the Canadian-resident member in respect of the LLC's earnings generally may not be claimed as foreign accrual tax. Additionally, complex treaty, hybrid mismatch arrangement, residency, and surplus issues may arise where a fiscally transparent LLC is used.
2. Financing Considerations
Canadian businesses should consider the tax consequences arising from using either debt or equity, or both, to finance a US acquisition. The optimal mix of debt and equity depends on the nature of the US business, expected cash flows, as well as the US group and Canadian parent's tax profiles. Using debt may provide a deduction in the US for interest and may especially be useful if the Canadian parent has losses to utilize and offset the corresponding interest income. Even if the US interest deduction is limited or restricted under applicable US tax rules, debt may still be beneficial as a pipeline to repatriate profits from the US to Canada without the incurrence of US dividend withholding tax.
3. Structuring
Many US acquisitions are structured as share deals effected by way of a merger transaction, under which the US target merges with and into a newly-incorporated US subsidiary of the buyer with, among other things, the target shares being converted into a right to receive merger consideration (generally, cash, shares of the Canadian parent, or some combination of the two). From a Canadian tax perspective there is generally little difference between structuring the US acquisition as a share deal or as an asset purchase. Structuring the US acquisition to occur by way of merger may be preferred for non-tax reasons as it is simpler from a shareholder approval perspective. However, it is important that a Canadian tax advisor review the merger agreement and plan of merger as there are aspects that are important from a Canadian tax perspective for which US counsel may not be attuned.
4. Post-Closing
Common post-closing considerations include confirming the active business analysis of the newly-acquired US company, confirming the Canadian surplus treatment of US income, and identifying any FAPI or transfer pricing issues. Where employees provide services on both sides of the border, it is important to consider dual Canadian and US payroll obligations and whether cross-border employment gives rise to carrying on business or permanent establishment issues in either Canada or the US.
Corporate Migration, Brendan Festeryga
Brendan Festeryga provided a review of relevant factors in corporate migration.
1. Motivations for corporate migration
There are a number of reasons that a corporation might take steps to reduce its legal and economic connections to Canada and shift them to a foreign jurisdiction, including the following:
- Inclusion on a US stock index. It may be advantageous for a corporation to be listed on stock indices to more easily access capital, among other reasons. Certain major stock indices only include US equities. However, what qualifies as a US equity for stock index purposes may not necessarily correspond to a corporation's jurisdiction of incorporation or tax domicile. Therefore, migration strategies, such as continuing out of Canada, may not be necessary for a corporation to be included on a US stock index.
- Avoidance of tariffs and/or accessing lower-tax jurisdictions. Migration may allow a company to avoid tariffs or obtain lower tax rates. Corporate decisionmakers should keep in mind that both tariff rates and the laws impacting foreign corporate taxation are liable to change.
- Investment Canada Act Depending on the nature of the corporation's business, the Investment Canada Act (Canada) may limit a corporation's pool of investors, influencing a desire to emigrate out of Canada.
2. Continuance
One method of implementing corporation migration is through continuance. However, continuance out of Canada could trigger a significant tax bill. Subsection 128.1(4) of the Income Tax Act (Canada) (the Act) deems a corporation to have disposed of and reacquired all of its property at fair market value immediately prior to ceasing to be resident in Canada, effectively taxing all net accrued gains in the corporation's assets. Additionally, section 219.1 of the Act imposes an "exit tax" on Canadian corporations equal to 25% of the amount by which the fair market value of the corporation's property exceeds the sum of its paid up capital and outstanding debts immediately prior to exit. This "exit tax" is intended to be a proxy for dividend withholding, and there is potential for treaty relief depending on the country of immigration. These tax consequences mean that other migration strategies may be preferable to a continuance from a Canadian tax perspective, unless a corporation has available losses that can shelter taxes on exit or its low share price makes continuance opportune.
3. Alternatives to Continuance
Two alternatives to continuance have emerged in the market for corporations wishing to shift their legal and economic connections out of Canada: exchangeable share transactions and M&A inversions. Although the alternatives may be more tax-efficient than continuance in some circumstances, each has its complexities:
- Exchangeable share transactions. These transactions may require extensive management on a go-forward basis to address the foreign affiliate dumping rules and Part VI.1 tax and to effect the efficient repatriation of funds.
- M&A Inversions. Although Canada does not have "anti-inversion rules", an M&A inversion requires careful planning and a consideration of the general anti-avoidance rule (GAAR).
When contemplating a corporate migration, different strategies should be considered in light of the goals sought to be achieved, the immediate tax risks, and the go-forward structure.
Tax Litigation Update, Dominic Bédard-Lapointe and Almut MacDonald
Dominic Bédard-Lapointe and Almut MacDonald closed the presentations with an update on recent decisions from Canadian courts:
1. The GAAR applies to loss trading cases in a range of contexts
In Total Energy v the King, 2025 FCA 77 (Total Energy), the Federal Court of Appeal applied Deans Knight Income Corporation v His Majesty the King, 2023 SCC 16 (Deans Knight) broadly to find that a series of transactions involving an income trust conversion resulted in an abuse of subsection 111(5) the Act. Furthermore, Total Energy affirms that the object, spirit and purpose of subsection 111(5) as identified in Deans Knight is not affected by subsequent amendments.
2. Interest rates used in loss consolidation arrangements must be reasonable
In Brookfield Renewable Power Inc. v QRA, 2025 QCCA 234, the taxpayer undertook a loss utilization transaction using a 14% interest rate on an intragroup loan. The Quebec Court of Appeal found that, although loss consolidation arrangement through loans between related parties are possible, (i) contextual factors should be considered when assessing if a rate is reasonable; (ii) reasonability of a rate is a fact-driven analysis with a high standard for appellate intervention; and (iii) 14% was not a reasonable rate in the circumstances.
3. A waiver of the normal reassessment period pursuant to subparagraph 152(4)(a)(ii) can benefit taxpayers by providing an opportunity to narrow the scope of issues on reassessment
In Csak v Canada, 2025 FCA 60 (Csak), the deadline to file a waiver of the normal reassessment period fell on a holiday. The Tax Court of Canada held in Csak v The King, 2024 TCC 9 that section 26 of the Interpretation Act (Canada) did not apply to extend the deadline, as this provision should only have a relieving effect and waivers are not for taxpayers' benefit. The Federal Court of Appeal overturned that decision, finding that waivers present a number of benefits to taxpayers, including providing additional time to make submissions, delaying reassessment, and narrowing issues in dispute. Csak is a reminder that a waiver of the normal reassessment period can be a useful tool to limit the broad powers of the Minister to advance alternative bases of reassessment.
4. The Crown's reply pleading in a Tax Court appeal is restricted by the auditor's assessment
In Uppal Estate v The King, 2025 TCC 34, the Tax Court held that the Crown is restricted to penalties assessed by the auditor and cannot plead an alternative penalty. Further, the Crown can plead alternative contradictory positions at trial (and can raise additional facts), but bears the onus of proving such facts.
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