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Bryan Bailey |
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Andrew Spiro |
In delivering its budget on March 4 2010, the Canadian federal government announced a significant liberalisation of Canadian tax laws applicable to non-resident investors in Canadian businesses.
Non-resident investors are taxable in Canada on gains realised from dispositions of "taxable Canadian property" (TCP), subject to treaty protection. They are also generally required to obtain a "section 116 clearance certificate" from the Canadian tax authorities in connection with dispositions of TCP. The process of obtaining a clearance certificate (even for treaty-exempt dispositions) typically takes many months, and has been a major irritant in many cross-border transactions. A purchaser will typically withhold 25% of the purchase price until a certificate is obtained.
Effective for dispositions after March 4 2010, the budget proposes to dramatically narrow the definition of TCP. In particular, it proposes to exclude shares of corporations unless the shares are real property interests. (Previously, all shares of private Canadian corporations were TCP). A share will generally not be a real property interest unless, at any time in the 60 month period preceding the disposition, it derives more than 50% of its value from Canadian real or resource property. This proposal is intended to bring Canada's domestic tax rules in line with its tax treaties, which generally exempt gains on share dispositions from Canadian tax unless the shares derive their value principally from Canadian real property.
The budget proposal, which is now contained in draft legislation, is welcome news. Non-resident investors (even those in non-treaty jurisdictions) will not be subject to tax on dispositions of Canadian shares, or be faced with burdensome "section 116" compliance or withholding obligations, unless the shares are real property interests. This will be particularly welcome to foreign private equity funds, and may in some cases eliminate the need for third country "blocker" structures when investing in Canadian businesses.
Bryan Bailey (bryan.bailey@blakes.com) and Andrew Spiro (andrew.spiro@blakes.com)
