Investment into Canada

Transcription

1 Asia Pacific International Core of Excellence Investment into Canada Chris Roberge Deloitte AP ICE - Canada Vanessa Poon Deloitte AP ICE Canada June 6, 2012

2 Agenda Canadian tax regime overview Introduction to Canadian tax incentives Key tax considerations for investment into Canada Selected Canadian tax issues Questions and Answers 1

3 Canadian tax regime overview 2

4 Canadian Taxation System Canada levies two basic types of taxation on corporations: A. Income tax Federal and Provincial (selected major provinces) Federal 16.5% 15% 15% Alberta 10% 10% 10% British Columbia 10% 10% 10% Ontario (closing rate) 12% 11% 10% Quebec 11.9% 11.9% 11.9% Saskatchewan 12% 12% 12% Withholding tax rate: Generally 25%; reduced treaty rates range from 5% to 15% (US is 0% on interest) 89 tax treaties in force B. Sales tax Federal and Provincial Federal 5% Provincial 0% to 8% generally Capital tax, stamp duties do not exist in most locations post

5 Combined Tax Rate Corporate Tax Rate Trend 45.00% Corporate Tax Rates 40.00% 35.00% 30.00% 25.00% Canada (Federal & Ontario) % 33.50% 33.00% 31.00% 28.25% 26.25% 25.50% In 2000, the Canadian tax rate was approximately 45%; nearly a 50% decrease! As of 2012, Canada has the second lowest statutory corporate tax rate amongst the G-7 countries. 4

6 Overview of the Canadian Corporate Income Tax system A corporation is considered to be a resident of Canada if it is incorporated in Canada or has mind and management in Canada Tax on worldwide income if Canadian tax resident No provision for filing consolidated income tax returns for group of companies or seeking group relief (i.e., no loss consolidation) Proper tax planning necessary to avoid mismatch of profit and loss in different entities Losses Non-capital loss: carryback 3 years; carry forward 20 years Capital loss: carryback 3 years; carry forward indefinitely Capital gains: 50% inclusion rate Branch profit tax levied on branches of foreign companies operating in Canada 25% in general (treaty rates are lower 15% under Canada-Singapore Treaty) 5

7 Introduction to Canadian tax incentives 6

8 Scientific Research & Experimental Development (SR&ED) One of the world s most generous SR&ED program, currently ranking third among OECD countries The SR&ED Program gives claimants cash refunds and/or tax credits for their expenditures on eligible research and development work done in Canada. Similar tax incentives are available at the provincial level (e.g., Quebec offers 17.5% refundable tax credits for foreign controlled corporations) Most companies significantly under claim due to lack of specific expertise in this area of taxation. Deloitte Canada: Largest incentive practice in Canada; larger than other Big Four firms combined 7

9 SR&ED Program Depending on its legal structure and size, an organization can either reduce its taxes by, or receive a federal tax refund of, 20% to 35% of eligible expenditures Deduction from income and a 20% ITC for non Canadian-controlled private corporations (i.e., foreign-owned) 2012 budget proposed a reduction of the rate to 15% (generally applicable to taxation years that end after 2013) Only companies with a business establishment in Canada can claim The federal credit is not refundable to non-ccpcs but can be applied against taxes payable of the year, 3 years back and 20 years forward 8

10 How the SR&ED ITC program works Activities eligible to the SR&ED ITC must comply with 3 basic criteria: Uncertainty: The outcome of the project should not be known initially Advancement: Projects should bring new knowledge Methodology: the method has to be systematic The law defines 4 types of activities that have to be distinguished, and the Canada Revenue Agency will verify what category your activities fall in: a) Basic science b) Applied research c) Experimental development d) Support activities 9

11 SR&ED Program Example Assumptions: - The corporation is a non-ccpc - 20 eligible $50K/year - 100% of their work is related to eligible activities - Subcontractors: $200,000 - Equipment: $100,000 Federal Quebec Total Salaries $ 1,000,000 $ 1,000,000 Proxy 65%* 650,000 Subcontracts 200, ,000** Equipment 100,000 Quebec SR&ED tax credit (192,500) $ 1,757,500 1,100,000 Federal tax 20% and Quebec tax 17.5% $ 351,500 $ 192,500 $ 544,000 *Limited by the corporation s other expenses (non R&D expenses) federal budget proposes to reduce the rate of which prescribed proxy amount is calculated to 60% in 2013 and 55% after **Only 50% of the subcontractors are eligible costs for the Quebec tax credit 10

12 Key tax considerations for investment into Canada 11

13 The M&A Approach Typical Acquisition Process Overview This is the process that inbound investors should follow in developing and executing their acquisition plans. One of the keys to M&A success is to ensure that the M&A strategy work in Phase 1 is well aligned with the Company s broader strategic vision and goals. Tax Modelling High level characteristics Bid Planning Bid Structure Corporate, JV, Partnership, Asset vs shares Liabilities, Asset availability Closing Reps, warranties, responsibilities Operational Planning Post Closing Tax Filings Post Closing Planning Stage 1 Stage 2 Stage 3 Merger & Acquisition Strategy Development Target Screening, Identification, and Initial Contact Preliminary Due Diligence (Financial, Operational & Strategic) Facilitate Meetings and Assess Interest Submission of Non-Binding Expression of Interest ( EOI ) Definitive Due Diligence Negotiate Final Transaction Implementation Planning Implementation and Transaction Closing Preparation Closing and Execute Implementation Plan Brainstorming session with Management Board or Steering Committee Approval Pursue Targets Completed Letter of Intent Executed Purchase Agreement Transfer of Ownership / Closing Documentation Successful transactions depend on adherence to a well devised acquisition process. Tax planning can change your bid price or your return by over 30% in Canada. 12

14 Canada-Singapore Tax Treaty Protocol Treaty was under renegotiation since 2004; protocol signed in November 2011 Only update was the article in relation to exchange of tax information (following the OECD model) Withholding tax rates as follow: Dividend: 15% Related-party interest: 15% Royalty: 15% 13

15 Use of a Canadian Acquisition Company Debt 66% SingCo CA Acq Co CA Target Equity 34% Three Principles: 1. AcquisitionCo PUC can be returned tax-free and can be distributed before retained earnings Dividends (actual or deemed) subject to withholding tax at 25% or reduced treaty rate (generally 15% under Canada-Singapore Treaty) 2. Internal Financing The Canadian Acquisition company ( CA Acq Co ) capitalized with a mix of equity and debt to satisfy thin cap limitations and maximize invested capital Interest deduction in Canada at around 25%, 15% Canadian withholding tax, net benefit 10%. 3. Merger Merger of CA Acq Co and CA Target through taxfree amalgamation or wind-up will allow offset of interest expenses against operating profits of CA Target 14

16 International Holding Structure Indirect Investment 5% dividend withholding tax rate SingCo SPVCo Canco Equity Debt:Equity (2:1) Highlight of Incremental Benefits SPVs in certain jurisdictions provide better treaty benefits than a direct holding from Singapore Dividends - 5% instead of 15% Interest 10% instead of 15% SPV limited or no taxation Capital gains no Canadian taxation for real property Unique Debt and Equity structuring characteristics Profit participating debt Deferred interest Preferred equity 15

17 Canadian Domestic Structure Issue: Many investors have more than one investment into Canada and are kept in separate legal entities and under different international structures for various business reasons. Solution: Use a master Canadian holding company Defer withholding tax of 15% until repatriation Singapore Dividend 15% withholding tax Singapore Canco 1 Canco 2 Loan / equity Can Holdco Dividend no Canadian tax Canco 1 Canco 2 16

18 Summary of Selected Tax Treaty Jurisdictions Canada s Tax Treaty Investor Country Rules Investor Country Interest Dividends Exemption for gains on Canadian shares** Participation exemption on gains Withholding tax on dividends paid Singapore* 15% 15% Subject to Limitation of Relief No No No Luxembourg 10% 5% (15% If < 10% of voting power) Yes Yes*** No Netherlands* 10% 5% (15% If < 10% of voting power) Yes Yes*** Yes**** Belgium* 10% 5% (15% If < 10% of voting stock) Yes Yes*** No*** *Required that recipient be the beneficial owner **Where the Canadian company derives its value principally from real property, and the company carries on its business with that property. ***Provided certain conditions are met. **** Potentially can achieve no withholding tax if proper tax planning is done. 17

19 Selected Canadian tax issues 18

20 Selected Domestic Tax Issues Interest deductibility capital expenditure; only deductible if certain conditions are met Thin capitalization rules debt:equity ratio (2:1) with respect to debt owing to a specified non-resident As noted earlier, 2012 federal budget proposes to reduce the thin cap limit to 1.5:1. Extending the thin cap rules to debts of partnerships where a Canadian-resident corporation is a member. Transfer pricing regime Key CRA audit focus area Contemporaneous documentation requirements 19

21 Non-residents: Potential Canadian Tax? Non-resident could be subject to tax in Canada under certain situations: Employed in Canada; Carried on a business in Canada; or Disposed of a taxable Canadian property ( TCP ). Non-residents performing services in Canada: Increased frequent business travellers and increased audit activity by the Canada Revenue Agency ( CRA ) on cross-border services Risks are significant Corporate tax non-compliance Withholding tax (Reg 105/Reg 102) non-compliance Personal tax non-compliance for employees Significant penalties can be imposed for non-compliance 20

22 Tax Cases - Beneficial Ownership - Prevost Car UKCo 49% SwedenCo 51% Background: Prevost paid dividends and withheld 5% under Canada - Dutch Treaty CRA reassessment - DutchCo was not the beneficial owner Withholding tax at rates applicable as if dividends were paid to shareholders (15% Sweden Treaty and 10% UK Treaty) DutchCo Prevost Car (Canada) Dividends: 5% or 10-25%? Decision: Federal Court of Appeal confirmed 5% rate: Dutchco not a conduit Dutchco had control/discretion over use of funds No pre-determined/automatic flow of funds 21

23 Tax Cases - Beneficial Ownership - Velcro Background: Royalty Royalty AntillesCo DutchCo Back to back royalty arrangement Issue is whether Dutchco was the beneficial owner of the royalty and entitled to treaty benefits. Taxpayer pleadings - DutchCo is the beneficial owner under both Canadian and Netherlands domestic law CRA pleadings - DutchCo is not the beneficial owner because: AntillesCo retained all ownership rights DutchCo acted as an agent for AntillesCo DutchCo was a conduit for AntillesCo CanCo Decision: Dutchco was beneficial owner and entitled to treat relief 22

24 Lessons Learned from Prevost Car and Velcro Decisions From a planning perspective, here are some helpful key points: A holding company with other activities would be a good candidate for this purpose if available and commercially feasible; It should have its own bank account to receive payments and the bank account should be under its sole legal control; Payments should not be made by direction directly to anyone else, bypassing the holding company; The payments received should not be segregated from any other sources of income of the recipient, and the funds should be used to pay other expenses as well as the related contractual obligation; and There should be a spread earned by the recipient, which ideally should be invested to earn income. 23

25 Contacts & CVs 24

26 Curriculum vitae Tel: Fax: Managing Director Canada Tax Services Asia Pacific International Core of Excellence Christopher Roberge, CA, CPA Chris is a member of the Asia Pacific International Core of Excellence (AP ICE) which is a core group of senior tax professionals that provides international tax services to Asia Pacific based companies investing abroad as well as multinational companies investing in the region. Chris is the leader of the Canadian desk. Chris specializes in assisting Canadian and Asian companies doing business together. Experience Chris has been practicing Canadian tax for over 17 years and is a tax partner of Deloitte & Touche LLP. In Canada he was most recently the leader of the Mergers & Acquisitions tax group in Deloitte Calgary and has also held numerous other tax roles. Chris has an extensive background in Canadian domestic and international tax, and is experienced in U.S. international tax issues. He has significant experience working with multinational companies dealing with inbound and outbound tax issues including global tax minimization, tax efficient financing, tax risk management, transfer pricing, and local country taxation. He has worked extensively on mergers and acquisitions including due diligences, designing and implementing complex takeover transactions, reorganizations and global refinancing. He is the key tax advisor for many large multinational companies and particularly focuses on Asian investors into Canada. 25

27 Curriculum vitae Tel: Fax: Senior Manager Canada Tax Services Asia Pacific International Core of Excellence Vanessa Poon Vanessa is a member of the Asia Pacific International Core of Excellence (AP ICE) which is a core group of senior tax professionals that provides international tax services to Asia Pacific based companies investing abroad as well as multinational companies investing in the region. Experience Vanessa was a Senior Tax Manager of the International and M&A Tax Services Group of the Deloitte Hong Kong office. She has been serving the M&A Tax Team of the Deloitte Toronto office in the past few years. She has experience in providing M&A services to the financial services, asset management and private equity clients, including performing tax due diligence and providing tax structuring advice to multinational clients. Vanessa has also advised clients extensively on international tax issues in relation both inbound and outbound investments to and from Canada. 26

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