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Selected Issues when Advising
the U.S. Buyer in Private
Company Acquisitions
Allan J. Ritchie, JD, LLM, MBA, CS
OBA Institute 2015 – Hot Topics in Corporate Law
February 5, 2015
Westin Harbour Castle, Toronto
The information presented is for general discussion purposes only and does not constitute legal advice for any
specific situation. Please contact any of the presenters if you have need for any specific legal advice.
About Loopstra Nixon LLP
Loopstra Nixon is a full-service Canadian business and public law firm
dedicated to serving clients involved in business and finance, litigation and
dispute resolution, municipal, land use planning and development, and
commercial real estate. Major financial institutions, insurance companies,
municipal governments, and real estate developers along with corporate
organizations and individuals are among the wide range of clients we are
proud to serve.
www.loopstranixon.com www.loopstranixon.com
Presenter Biography
Allan has particular expertise executing international business transactions on behalf of foreign entities
entering the North American market and domestic entities seeking global opportunities. He also serves a
number of foreign law firms as Canadian agent counsel. In 2015 Lexpert Magazine named Allan one of
"Canada's Leading Canada/US Cross Border Lawyers to Watch", in recognition of his growing
international business practice.
Allan holds the unique distinction of being the youngest lawyer ever certified by the Law Society of Upper
Canada as a Specialist in Corporate and Commercial Law.
Allan J. Ritchie, Partner
E-mail: [email protected]
Tel: (416) 748-4754
Allan became a partner of the firm in 2010 after
several years with the Toronto office of a United
States based, global law firm.
He is licensed to practice law in Canada and the
United States and manages a global corporate
finance and commercial law practice.
The State of the Union
Purchased by US Buyers:
More available for sale, at lowest price since before the 2008/09 Global Financial Crisis …
Outline of Today’s Presentation
Four Quick Structural Questions
Most Common U.S. Entities
Canadian Entity Options for U.S. Clients
Principles of the Canada - U.S. Tax Treaty
Branch Operations
Standard Corporate Structures
Hybrid Structures
CCPC Status
Trade Regulation (Competition Act / Investment Canada Act)
Employment Issues
Cross-Border Opinions
Four Quick Structural Questions
1. Will the U.S. buyer acquire control?
• Investment Canada Act, CCPC,
2. How does the U.S. Buyer Carry on Business?
• LLC, S-Corp, C-Corp
3. Profit/loss expectations for the Canadian target?
• Flow Through, Hybrid or Traditional Structure
4. How will the acquisition be financed by the US Buyer?
• Debt Versus Equity – Thin-Cap Rules
Most Common U.S. Entities
> Formed under State statute
> C-Corps are taxed at the entity level and generally more widely held
‘C’ Corporations (“C-Corps”):
Subchapter ‘S’ Corporations (“S-Corps”):
> Formed under State statute
> Election as S-Corps with the IRS and State tax authorities
> S-Corps are closely held and are generally flow-thru tax entities
Limited Liability Companies (“LLCs”):
> Formed under State statute
> “Members” not “Stockholders”
> Generally flow-thru tax entities treated as a sole-proprietorship (for single
member LLCs) or partnerships (multi-member LLCs)
Canadian Entity Options for U.S. Clients
> Require 25-50% Canadian resident directors (not B.C., N.S., N.B., P.E.I.)
> Limited liability
Provincial or Federal Business Corporations
Foreign Registered Branch
> Registration with Canada Revenue Agency
> Registration as an ‘Extra-Provincial’ entity where applicable
> Unlimited liability for Canadian operations
> Branch tax applies on after tax profits
Unlimited Liability Companies (“ULCs”):
> Only available in B.C., Alberta, and Nova Scotia
> Unlimited Liability
> ‘Hybrid’ treatment may have benefits
Canada – U.S. Tax Treaty: General Principles
Like all OECD Treaties, the goal is to prevent double taxation and to
foster cooperation among treaty parties
defines which taxes are covered and who is a tax-resident and eligible
for benefits
reduces the amount of tax withheld from interest, dividends, and
royalties paid by a resident of one country to residents of the other
country
limits tax of one country on business income of a resident of the other
country to that income from a permanent establishment in the first
country
Canada – U.S. Tax Treaty: General Principles
…continued
define circumstances in which income of individuals resident in one
country will be taxed in the other country, including salary, self-
employment, pension, and other income
provide for exemption of certain types of organizations or individuals
provide procedural frameworks for enforcement and dispute resolution
Canada – U.S. Tax Treaty: Cross Border Issues
> Do you have a ‘Permanent Establishment’ ?
Generally a fixed place of business
Basis of taxation of non-resident business income
> Thin Capitalization Rules
Limits interest deductibility on loans from US parent co
> Royalties, Management Fees and Passive Income
Generally subject to 25% withholding tax
> Transfer Pricing Issues
Ensures related party transactions are priced on an
arm’s length basis
> Branch tax
Any income generated from a Canadian ‘permanent
establishment’ attracts (25% on after-tax income not re-
invested in Canada)
U.S. Company Operating a Foreign Branch
US Company
Canadian Branch
Canada
United States
• Not a separate legal entity • US Company has unlimited liability
for Canadian operations • Registered with CRA • Registered with Province(s) • “Branch Tax” is applicable • Losses of Canadian operations can
‘flow thru’ to US Company
Standard US Company with Canadian Subsidiary
US Company
Canada
United States
• Separate legal entity • US Company has limited liability for
Canadian operations • Witholding tax on corporate
distributions (25% reduced to 5% if treaty applies)
• Director residency issues except BC, NS, NB, PEI
• No ‘flow thru’ of losses to US Company
Canadian Limited Corporation
Hybrid Structures
Delaware S-Corp #1
Canada
United States
• Separate legal entity • Corporation for Canadian Tax Purposes • Partnership for U.S. Purposes • US Company has unlimited liability for
Canadian operations • 2-step distribution now required • Losses ‘flow thru’ to US Company British Columbia ULC
Delaware S-Corp #2
.01% 99.99 %
Canadian Controlled Private Corporation Status
Make sure U.S. investors know how much their ‘American-ness’ will cost them.
What is a CCPC
In order to qualify as a CCPC the company must not be controlled,
directly or indirectly in any manner whatever, by public
corporations, non-residents or a combination of the two.
CCPC Benefits that will fall away
Small business deduction
Enhanced SRED credits (refundable)
Life time capital gains exemption
Deferral of taxable benefit from exercise of stock options
Pitfalls
Option agreements, contingent or otherwise will terminate CCPC
status (be careful with minority investments)
Trade Regulation
Pre-Merger Notification (Competition Act)
Transaction size threshold C$86 million for 2015
Combined assets or revenues with affiliates threshold C$400 million
Investment Canada Act
Transaction threshold of C$369 million for 2015 for WTO Investors
must be of ‘net benefit to Canada’
‘Cultural Sector’ investment review threshold at C$5 million
ALL acquisitions of control by US Investors require a Investment
Canada Act Notification within 30 days of the investment
Employment Law
“They’re entitled to what?!”
Absence of ‘at-will’ employment.
Impact of universal health care.
Parental leave entitlements.
Employee v. Independent Contractor
Enforceability of Restrictive Covenants
Human Rights Tribunal
Mandatory Workplace Safety
Insurance Regime
Cross-Border Opinions
Three options when you are asked to provide a cross border opinion:
Independent Opinions: US Counsel provides a separate opinion and
neither Canadian nor US opinion refer to each other.
Co-Dependant Opinions: Canadian counsel’s opinion refers to the
US Counsel’s opinion, but does not repeat its conclusions on US
Matters. US Counsel’s opinion is addressed to Canadian Counsel
and the seller.
Umbrella Opinions: US Counsel’s opinion is addressed only to
Canadian counsel and Canadian Counsel expresses its reliance on
the US opinion and repeats its conclusions.
Questions?
