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Canada: Extension of Canadian thin capitalisation rules announced



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 (

Tel: +1 416 863 3898

Ian Caines (

Tel: +1 416 863 5277

Blake, Cassels & Graydon

Fax: +1 416 863 2653


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