Canada: Extension of Canadian thin capitalisation rules announced

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Canada: Extension of Canadian thin capitalisation rules announced

penny.jpg

caines.jpg

Kathleen Penny


Ian Caines

The Canadian Income Tax Act (ITA) contains thin capitalisation rules limiting the ability of Canadian resident corporations to reduce their taxable income by using related party debt financing from non-residents. Where these rules apply, interest deductions may be denied, and interest payments may be deemed to be dividends for withholding tax purposes. The 2014 Canadian federal Budget proposes to extend these rules to also apply to a range of back-to-back lending arrangements, where an unrelated intermediary lends money to a Canadian corporate borrower, the intermediary receives certain benefits from a non-resident and the thin capitalisation rules would otherwise have applied to a direct loan from the non-resident to the borrower. According to the Budget, the new rules are aimed at arrangements that interpose "a third party (for example a foreign bank) between two related taxpayers" to avoid the thin capitalisation rules, that is where a non-resident effectively funds an unrelated intermediary's loan to a Canadian resident related to the non-resident. However, as proposed, the new rules are drafted very broadly and might (depending on how they are interpreted) result in the application of the rules in situations where (i) a non-resident directly or indirectly provides an interest in property to the intermediary as security for a borrower's debt, or (ii) the intermediary owes any debt to the non-resident for which recourse is, or may be, limited. As proposed, it appears that these rules might apply in a broad range of common commercial transactions, such as where a Canadian corporation's borrowing is supported by a secured guarantee from a non-resident parent company or other non-resident affiliate, or where such a Canadian corporation is party to a secured co-borrowing. The rules might also apply to certain corporate group cash pooling arrangements, where Canadian entities are in a net debit position in the arrangement. We understand that government officials are considering whether the possible reach of the new rules may go beyond what had been intended, and if so the government may narrow the scope of the new rules in the final enacted legislation.

Kathleen Penny (kathleen.penny@blakes.com)

Tel: +1 416 863 3898

Ian Caines (ian.caines@blakes.com)

Tel: +1 416 863 5277

Blake, Cassels & Graydon

Fax: +1 416 863 2653

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

Looking at transfer pricing simplification is “obviously helpful”, but it should be done in line with current standards, a senior government figure reportedly said
The UK Government’s plans to close the tax gap via increased HM Revenue and Customs investment have failed to impress local tax advisers
Under the merged scheme for R&D tax relief introduced last year, rules on contracted out R&D have changed. James Dudbridge argues for a proactive approach when reviewing companies’ commercial arrangements
Cultural nuances could account for tax advisers’ perceived poor cost management, a local partner told ITR
Updated rules represent a significant shift in the Luxembourg TP landscape and emphasise the need for robust arm’s-length calculations, says Vanessa Ramos Ferrin of TransFair Pricing Solutions
KPMG Law US revolves around contract managed services and the US is the largest market for that, Stuart Bedford tells ITR in an exclusive interview
The US law firm’s tax counsel tells ITR about inspirations from a ‘legendary’ German tax scholar, perfecting riesling wine and what makes tax cool
Wopke Hoekstra also swore the EU would ‘hit back harder’ if faced with a trade war; in other news, a UK watchdog has launched an investigation into an audit completed by MHA
Other reasons included the complexity of reporting, resource constraints and interactions with tax administrations
Despite this boost for investors, the OECD also said that extensive reliance on income-based instruments across economies is concerning
Gift this article