Interested in authoring for

Canadian Briefings Visit www. accdocket.com/digitaldocket/ edguide.cfm, or contact Associate Editor Joshua Shields at j.shields@acc.com.

Expanding a US Business into
Canada: Common Canadian Tax
Issues to Consider

By Kirsten Kjellander, Partner, and Robert Biggar, Associate, Borden Ladner Gervais LLP

US companies that are looking to expand internationally often look to Canada first as a place to test the waters.

Canada’s geographic proximity, similar legal system, culture, and language all make it a good place to start for a US company interested in international opportunities. However, there are significant differences between the Canadian and US tax systems that often catch US residents off guard. This article will provide an overview of common taxation and structuring issues that US companies face when expanding organically into Canada. The unique issues that arise where a US company chooses to expand into Canada by acquiring an existing Canadian business are beyond the scope of this article and will not be discussed.

One general aspect of Canadian tax law that is often surprising to US tax advisors is the emphasis on legal form over economic substance. In Canada,

the corporate form of a transaction matters is usually determinative of the tax treatment of the transaction absent the application of various anti-avoidance rules. Generally, there are fewer opportunities than in the United States for taxpayers to elect to treat a transaction differently for tax purposes than it is treated for purposes of corporate law. For example, there is no ability to elect a pass-through treatment for an entity classified as a corporation under Canadian law and no equivalent to the section 338 election that can be used to step-up the cost base of underlying depreciable property on a purchase of shares. There is also no requirement that a transaction have a “business purpose,” although there is a statutory general anti-avoidance rule (GAAR) that applies where a transaction with no primary business purpose has produced a tax benefit in an abusive manner.