Thin-capitalization rules 

Things to know

  • Thin-capitalization rules restrict the ability of Canadian corporations and trusts to deduct interest expense on debt owing to certain related non-residents. The thin-capitalization rules also apply to Canadian branches of foreign corporations. 
  • Generally, thin-capitalization restrictions apply if the non-resident owns 25% or more of the shares of the debtor corporation (by vote or value) or 25% or more of the interests in the debtor trust (by value). 
  • Interest deduction will be limited proportionally if a debtor’s outstanding debts to related nonresidents exceed 1.5 times the debtor’s equity. 
  • Any non-deductible “excess” interest is treated as a dividend for withholding tax purposes, and would trigger withholding tax at a rate of 25% subject to reductions under an applicable tax treaty. 
  • Specific rules exist to address, among other things, back-to-back loan arrangements and borrowings by partnerships.

Things to do

  • Keep the thin-capitalization rules in mind when planning how to finance your Canadian subsidiary and determining how much equity and how much debt to contribute. 
  • The intra-group debt-to-equity ratio of Canadian members of a corporate group should be monitored periodically to ensure compliance with the thin-capitalization rules.

Canada Company Registration

Company Formations Canada offers fast and easy company registration in Canada for non-Canadian residents and foreign companies wishing to operate and do business in Canada.

Register a new company in Canada as a non-Canadian resident

Register a foreign company in Canada

Canada Registered agent services for foreign companies and non-Canadian residents.

Canada Nominee director services for foreign companies and non-Canadian residents.

Shared from: Osler, Hoskin & Harcourt llp Publication

, ,