OTTAWA — The federal budget unveiled last week allows the Canadian government to remove withholding tax on arm’s-length interest payments under the Canada-U.S. Tax Treaty and with other countries.
“This will increase capital inflow into Canada by reducing the tax burden a company has to pay,” said Heather O’Hagan, associate tax partner at Toronto-based KPMG LLP, part of KPMG International.
It will also further bolster the Canadian mergers-and-acquisitions market, which finished 2006 with another impressive quarter. Last year was the strongest year ever for M&A activity, according to data released last month by investment bank Crosbie & Co. Inc., a Toronto-based investment bank.
Crosbie reported that there were 1,968 announced deals last year, a 22% increase from the 1,613 deals in 2005. The total value of those transactions was $257 billion, a 55% increase from $165 billion the previous year.
“The conditions for M&A in Canada have never been better,” said Ed Giacomelli, managing director at Crosbie. “The breadth of activity across all industry sectors underscores the sheer strength of this M&A cycle.”
Nine of the 10 largest deals had an international component, and the dollar volume of cross Canadian merger deals hit a record high last year, noted Crosbie.
Hollowing out
U.S. investors sizing up the impact of a proposed deal have to worry about Ottawa’s view in general of foreign investment. Indeed, foreign takeovers of Canadian companies alarm those who fear a hollowing-out of the Canadian economy, with jobs and decision-making power leaving the country (InvestmentNews, Nov. 6).
“We’re putting an end to the practice of corporations’ borrowing in Canada to fund business operations abroad and then using the interest deductions to offset Canadian income,” Finance Minister Jim Flaherty said in his budget speech. “It is a practice that has resulted in Canadian taxpayers’ indirectly subsidizing the foreign operations of multinational corporations and paying the price in reduced business activity and job losses in Canada.”
Legislative changes
Other measures to combat this hollowing-out have been proposed, including changes to Canada’s foreign-investment legislation, the Investment Canada Act.
The government’s commitment to review the act was made clear in a document titled “Advantage Canada,” which Canada’s Department of Finance released Nov. 23 (Investment News, Dec. 11).
But the budget didn’t include any measures to change it; nor did the budget deal with
private equity.
Private-equity groups were involved in 16 of the 51 so-called megadeals — that is, those valued at more than $1 billion — last year, according to Crosbie.
“A web of counterproductive tax rules blocks the inflow of needed foreign cash to Canada’s private-equity sector,” according to a study released Feb. 13 by the C.D. Howe Institute, a Toronto-based think thank.
In the study, “Financing Canadian Innovation: Why Canada Should End Roadblocks to Foreign Private Equity,” lawyers Stephen A. Hurwitz and Louis J. Marett argue that these rules block hundreds of millions of dollars in foreign (mostly U.S.) investment capital.
Regulations abound
The Investment Canada Act isn’t the only the piece of legislation that foreign investors have to worry about.
They also have to take into account the myriad regulatory agencies, which operate on a “hands-off” basis and sometimes prolong a deal.
For instance, on March 13, the Canadian Radio-Television and Telecommunications Commission said that it will review issues related to the Federal Broadcasting Act in light of recent transactions involving such Toronto-based companies as Standard Radio Inc., CHUM Ltd., CTVglobemedia Inc. and Alliance Atlantis Communications Inc., and Astral Media Inc. in Montreal.
“The current wave of
consolidation in the Canadian broadcasting industry, and the possibility of more major transactions in the future, raises important questions relating to the diversity of voices in Canada,” said Konrad von Finckenstein, chairman of the CRTC.
“Holding a public hearing in the fall will allow us to give these issues the thorough and in-depth study they deserve,” he said. “This exercise will result in clearly articulated policy guidelines that will further the evolution of the Canadian broadcasting system from that point forward.”
