Global

Details

  • Service: Tax, International Corporate Tax, International Executive Services, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 6/15/2012

Canada - Changes to thin capitalization regime—possible action steps 

June 15:   Canadian corporations that owe debt to certain non-residents need to carefully review the impact of the major modifications to Canada’s “thin capitalization” regime announced in the 2012 federal budget.

These modifications include:


  • A reduction in the debt-to-equity ratio
  • An extension of the regime to partnership debt
  • The introduction of a new deemed dividend rule for excess interest expense

Although the reduction of the debt-to-equity level to 1:5 to 1 (from 2:1) will generally not apply until 2013, important changes are already in effect. As such, taxpayers need to understand the new rules and to assess the impact on the current financing structure of Canadian corporations. There may still be time to implement tax planning strategies to mitigate any adverse tax consequences that may result from the proposed new rules.


Certain aspects of the new thin capitalization regime are already in effect. The treatment of denied interest expense as a deemed dividend and the related Part XIII non-resident withholding tax obligations on current debt-to-equity levels in excess of 2:1 apply to tax years that end after March 28, 2012. In addition, the new regime no longer limits the thin capitalization rules to just corporate debt for tax years beginning after March 28, 2012. Under the proposals, these rules will be extended to apply to debts owed by partnerships of which a Canadian-resident corporation is a member.


To read a June 2012 report, prepared by the KPMG member firm in Canada: Time Running Thin for “Thin Cap” Planning



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Direct comments, including requests for subscriptions, to go-fmtaxnewsflash@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.
 

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