Kendall R. Fisher

In September, a new bill was introduced in the U.S. Senate entitled the “Halting International Relocation of Employment Act” or “HIRE Act” (the “Bill”). Generally, the Bill proposes a 25% excise tax on certain outsourcing payments made by U.S. persons or entities to non-U.S. persons or entities. The Bill, if enacted, could have a significant impact on Canadian companies that are currently engaged in certain cross-border arrangements with U.S. companies, including subsidiaries or affiliates. In general, the Bill would impose a 25% excise tax on any premium, fee, royalty, service charge, or other payment made in the course of a trade or business by a U.S. person to any non-U.S. person if the benefit of the labor or services is directly or indirectly directed to consumers located in the United States. In addition, the Bill would also generally prohibit U.S. companies from deducting any such outsourcing payments in determining their U.S. federal taxable income. The Bill provides little specific guidance as to the meaning of these terms. Accordingly, if this legislation were to be adopted into law, the scope of payments or activities that might otherwise be subject to the excise tax and deduction denial remains uncertain. However, based on the language used in the draft proposal, intercompany and affiliate licensing or service arrangements appear likely to be “within scope”. To date, the sponsor of the Bill has been unsuccessful in bringing the Bill up for debate before the full U.S. Senate due, in part, to the current government shutdown. It is unclear whether and to what extent the Bill may gain support in the future. We will continue to monitor this proposed legislation. Any Canadian company that is currently engaged in, or is considering, a cross-border licensing, service or similar arrangement with a U.S. company (including subsidiaries or affiliates) should monitor the progress of the Bill and consider the potential impact its passage could have on those arrangements.

As discussed in our prior blog posting, Canadian companies should be aware that, if they engage in certain “organizational actions” (as discussed below) that affect the tax basis of their securities held by one or more U.S. persons, they may be required to evaluate the effect of such action on the U.S. holder’s tax basis and promptly disclose this information on a properly completed IRS Form 8937, Report of Organizational Actions Affecting Basis of Securities. Generally, Internal Revenue Code Section 6045B (including the Treasury Regulations promulgated thereunder) requires an issuer classified as a corporation for U.S. federal income tax purposes of certain securities to report on an IRS Form 8937 any “organizational action” that affects the tax basis of such securities held by one or more U.S. holders. For these purposes, Canadian residents who are U.S. citizens or green card holders are also treated as U.S. holders. “Organizational actions” include, without limitation: tax-deferred mergers, amalgamations and other acquisitions under Code Section 368(a), contributions of property to controlled corporations under Code Section 351(a), contributions to capital without the issuance of additional securities, tax-deferred stock distributions, share consolidations (i.e., reverse-stock splits), tax-deferred spin-offs, distributions that are treated as a return of capital (i.e., a distribution in excess of a company's earnings and profits), taxable liquidations under Code Section 331 which involve more than one distribution in liquidation, recapitalizations, redomiciliations and conversions under Code Section 368(a), and modifications of specified debt instruments. Issuers required to report an “organizational action” on an IRS Form 8937 may generally satisfy the applicable reporting requirements in one of two ways. Firstly, a corporate issuer may satisfy the reporting requirement by (a) providing the IRS Form 8937 to the IRS within 45 days of the “organizational action” (or by January 15th of the following year, if earlier), and (b) providing the IRS Form 8937 to the affected securityholders by January 15th of the following year. Alternatively, such an issuer may satisfy the applicable reporting requirement by timely posting the IRS Form 8937 on its public website within 45 days of the “organizational action” (or by January 15th of the following year, if earlier) and maintaining it on such public website (or any successor website) for ten years. For purposes of administrative convenience, most companies that maintain a corporate website generally choose this latter option of posting the IRS Form 8937 on their public website. The instructions to IRS Form 8937 provide that issuers required to report an “organizational action” on an IRS Form 8937 may make reasonable assumptions about the quantitative effect on tax basis that cannot be precisely determined by the due date. If such an issuer later determines facts that would result in a different quantitative effect on tax basis from what was previously reported, then such issuer would generally be required to file a corrected return with the IRS within 45 days of making such determination and to provide such corrected return to the affected securityholders by the later of the January 15th due date (discussed above) or within 45 days of making such determination. A non-U.S. issuer classified for U.S. federal income tax purposes as a corporation is subject to the same reporting rules described above as a U.S. issuer classified for U.S. federal income tax purposes as a corporation, provided it has at least one securityholder who is not an exempt recipient (such as a U.S. individual or partnership). For example, a Canadian unlimited liability company which elects to be treated as a corporation for U.S. federal income tax purposes is treated as a corporation for IRS Form 8937 reporting purposes. Penalties may apply for the failure to properly report an organizational action. An acquiring or successor entity of an issuer must also satisfy the above reporting obligations if the original issuer has not done so. Dorsey & Whitney regularly assists taxpayers with their reporting requirements under IRS Form 8937. If you have any questions or would like to learn more, please contact us.

On February 27, 2025, FinCEN confirmed that it would halt enforcement actions in relation to the Corporate Transparency Act (“CTA”) while it developed revised regulations that would prioritize reporting for “those entities that pose the most significant law enforcement and national security risks.” On March 2, 2025, the U.S. Treasury Department confirmed that the scope of those new regulations would be limited to “foreign reporting companies” only, and that Treasury would not “enforce any penalties or fines against U.S. citizens or domestic reporting companies or their beneficial owners after the forthcoming rule changes take effect”. Essentially, the U.S. government has now abandoned the CTA for the vast majority of reporting companies that were covered under the prior regime. Dorsey will continue to monitor developments and will review the proposed revised regulations in detail once published. Of particular importance will be the defined terms “domestic reporting company” and “foreign reporting company”, as referred to in the recent Treasury announcement, and whether the forthcoming regulations will retain the current definitions of those terms. Under the existing regulations, a U.S. entity formed and wholly-owned and/or controlled by a Canadian company or Canadian person would constitute a “domestic reporting company”. Assuming the revised regulations will not change this definition – such entities would be exempt from the enforcement of penalties or fines under the CTA. Under the existing regulations, Canadian entities that have registered to do business in the U.S. by the filing of a document with a secretary of state or similar office would generally be considered “foreign reporting companies”. Again, assuming the revised regulations will not change this definition, such entities would remain subject to CTA enforcement and penalties and fines for non-compliance. While Treasury’s recent announcement should be welcome news for many U.S. entities formed by Canadian companies and Canadian persons, we remain cautious as the changed scope of CTA enforcement in Treasury’s announcement may have been unintentionally broad and may be subject to refinement upon release of the forthcoming regulations.

Canadian corporations making dividend payments should ensure that they are compliant with U.S. federal backup withholding and reporting requirements to avoid potential U.S. federal income tax issues. Generally, a Canadian corporation making a payment of dividends aggregating USD$10 or more to another person during the calendar year is subject to the U.S. federal backup withholding and reporting regime. However, a dividend payment by a Canadian corporation is excluded from these rules if it is: from sources outside the United States; by a non-U.S. payor or a non-U.S. middleman; and paid and received outside the United States. For purposes of this discussion, a reference to a “Canadian corporation” does not otherwise include a Canadian corporation that is treated as a U.S. domestic corporation for U.S. federal income tax purposes under the “anti-inversion rules” in Section 7874(b) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Assuming that a payment from a Canadian corporation constitutes a “dividend” for U.S. federal income tax purposes (which analysis often differs from Canadian tax rules), and assuming the payee is not otherwise an exempt employee (which is beyond the scope of this blog article), a dividend payment must satisfy each of the above requirements in order to be exempt from U.S. federal backup withholding and reporting requirements. In respect of the first requirement above, dividends from a Canadian corporation are generally treated as paid from sources outside the United States unless 25% or more of the corporation’s gross income from all sources for the prior three years was, or was treated as, effectively connected with the conduct of a trade or business within the United States. In respect of the second requirement above, a Canadian corporation or its non-U.S. middleman (e.g., a non-U.S. financial institution or broker acting as an intermediary) generally should be treated as a non-U.S. payor or non-U.S. middleman. However, certain Canadian corporations or middlemen are not treated as non-U.S. payors or non-U.S. middlemen for these purposes including, without limitation, those that are: (i) “controlled foreign corporations” under Code Section 957(a), (ii) foreign partnerships in which the majority of interests are held by U.S. persons, or (iii) foreign persons for which 50% or more of the gross income for a three-year period has been effectively connected with the conduct of a U.S. trade or business, as applicable. In respect of the third requirement above, the payment of a dividend by a Canadian corporation (not otherwise treated as a U.S. payor, as discussed above) is generally considered to be made outside of the United States unless (i) such payment is made to an account maintained by a payee in the United States or by mail to a United States address, and (ii) the Canadian corporation’s shares are: registered under the Securities Act of 1933; listed on an exchange that is registered as a national securities exchange in the United States; or included in an inter-dealer quotation system in the United States. Generally, a Canadian corporation should be aware if its securities are either registered under the Securities Act of 1933 or listed on an exchange that is registered as a national securities exchange in the United States (e.g., the NSYE or Nasdaq), and thus whether its dividends are currently subject to U.S. federal backup withholding and reporting requirements. However, even if the shares of a Canadian corporation are not otherwise registered under the Securities Act of 1933 or listed on a national securities exchange in the United States, it is nonetheless possible that prices for such Canadian corporation’s shares could be quoted on an inter-dealer quotation system in the United States (e.g., certain of the OTC platforms). If a Canadian corporation’s share prices are quoted on an applicable inter-dealer quotation system in the United States, then dividends paid to an account maintained by the payee in the United States or mailed to a U.S. address would generally be subject to the U.S. federal backup withholding and reporting requirements. In the event a dividend payment is subject to the U.S. federal backup withholding and reporting requirements, the Canadian corporation would be required to withhold backup withholding in respect of such payment at the U.S. federal backup withholding tax rate, currently at a rate of 24%, unless, prior to payment, the payee provides to the Canadian corporation a properly completed and duly executed IRS Form W-9 certifying that such payee is not subject to U.S. federal backup withholding tax. Collecting U.S. tax forms in advance of dividend payments requires advanced planning. The U.S. federal backup withholding and reporting requirements are complex. Canadian corporations should consult with U.S. counsel and review the potential application of the U.S. federal backup withholding and reporting regime before making a dividend payment.

This is a reminder that the deadline to file initial Beneficial Ownership Information Reports with FinCEN is January 1, 2025 for all non-exempt entities formed or registered to do business in the United States prior to December 31, 2023. The deadline is within 90 days of formation for all non-exempt entities formed or registered in 2024 (and within 30 days of formation for all non-exempt entities formed or registered on or after January 1, 2025). In January, we published this summary of the Corporate Transparency Act, in addition to our long form update on the CTA. Our attorneys are ready to assist with any questions you may have.

On January 1, 2024, new direct reporting requirements to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Department of the Treasury, became effective – known as the Corporate Transparency Act (the “CTA”). Who must file? The CTA, and the regulations promulgated thereunder, apply to corporations, limited liability companies, limited partnerships and similar legal entities either formed in the United States (a “Domestic Reporting Company”) or formed outside the United States but registered to do business in the United States (a “Foreign Reporting Company”). Such entities must identify their natural person beneficial owners and “company applicants” (i.e. the person(s) responsible for the formation or registration of the entity), and disclose certain personal information with respect to each of them. Persons and businesses covered under these new compliance obligations will be confronted with potentially difficult initial reporting and subsequent reporting requirements. Beneficial ownership information (“BOI”) will be reported directly to the federal government. Civil and criminal penalties may apply for non-compliance. Required BOI for each beneficial owner will include, amongst other things, full name, residential address, date of birth, and a photo page of a non-expired U.S. government ID (or, in absence, a foreign passport photo page). When will filing obligations start? For non-exempt Domestic Reporting Companies and Foreign Reporting Companies formed on and after January 1, 2024, an initial report must be filed within 90 days following corporate formation or registration. For non-exempt entities formed or registered prior to January 1, 2024, entities must file an initial report by January 1, 2025. After making an initial report, all entities will be required to file amended reports within 30 days after becoming aware that a previous filing was inaccurate or requires updating (for example, in connection with a change in beneficial ownership). Information disclosed to FinCEN will not be publicly available, but may be obtained by federal agencies engaged in national security, intelligence, or law enforcement activity, certain federal regulators, and certain state, local and tribal law enforcement agencies. Further, certain foreign officials, and certain financial institutions and banks subject to customer due diligence requirements, may also be granted access via submission of a request through a U.S. federal government agency. Who is exempt from the new rules? The intent of the CTA is to collect and compile BOI for legal entities whose ownership and management is not otherwise available. While the CTA provides 23 exemptions to the reporting requirements, most of the available exemptions are limited to regulated entities (e.g., banks and healthcare companies) or large companies with a substantial employee, revenue and operating presence in the United States. Note that most Canadian issuers that conduct business in the U.S. typically do so through a structure that utilizes one or more U.S. subsidiaries. Under this structure, the parent itself typically does not conduct business in the United States and is not qualified to do business in the United States. Accordingly, under this most common structure, the parent would not be a Foreign Reporting Person and therefore would not be subject to the CTA directly. However, its U.S. subsidiaries would need to file if they are not themselves exempt. For most Canadian issuers, the three key exemptions most likely to be relevant are (1) “securities reporting issuers,” (2) “large operating company” and (3) “subsidiary of certain exempt entities.” Securities Reporting Issuer A “Securities Reporting Issuer” is an entity that (i) has a class of securities registered under the U.S. Securities Exchange Act of 1934, as amended (the “34 Act”), and (ii) has a current reporting obligation under the 34 Act. All Canadian issuers that file annual reports on forms 40-F, 20-F and 10-K, including all issuers cross-listed on Nasdaq, NYSE or NYSE American, will qualify as Securities Reporting Issuers. Issuers that are traded on the over-the-counter market in the U.S. (i.e. the OTCQX, OTCQB or OTC Pink) and rely upon an exemption from registration under the 34 Act will not qualify as a Securities Reporting Issuer.           Large Operating Company A “Large Operating Company” is an entity that, in simplified form, has more than 20 full-time employees in the U.S., has gross revenues in excess of $5 million in the U.S. and has a physical operating presence in the U.S. In the typical cross-border structure described above, the Canadian parent would not have a physical presence in the U.S., so the top-tier U.S. subsidiary (if there are multiple entities) would likely be the entity for which the analysis would be applicable. Note that each portion of this test, other than revenue (which may be computed on a consolidated basis), is determined on a separate entity-by-entity basis. Accordingly, some U.S. subsidiaries of Canadian parent companies may be exempt under this test, while others may not be. For some companies, we anticipate that a reevaluation of their subsidiary structure might provide an opportunity to qualify for an exemption from the CTA. Subsidiary of Certain Exempt Entities A Subsidiary of Certain Exempt Entities is any entity that is “controlled or wholly owned, directly or indirectly, by one or more entities” that meet one of the other categories of exemptions under the CTA (although not the exemptions for money services businesses and certain pooled investment vehicles). Notable, however, that FinCEN declined to define “control” in determining the applicability of the subsidiary exemption (although appeared to suggest in its Final Rule that control through majority ownership may not be sufficient for this exemption to apply). All Canadian issuers that are cross-listed in the U.S. will  themselves be eligible for an exemption from the CTA reporting requirements. In addition, their direct and indirect wholly-owned subsidiaries will also be exempt. Less than majority-owned subsidiaries may also be exempt, depending on the circumstances. Other issuers with operations in the U.S. may also be eligible for an exemption, though careful analysis will likely be necessary. Please refer to our long-form update on the CTA HERE. Our attorneys are ready to assist with any questions you may have.

In our blog post dated August 22, 2022, we discussed the one percent (1%) excise tax on certain stock repurchase transactions by certain publicly traded corporations enacted as part of the Inflation Reduction Act of 2022 (the “Excise Tax”). The Excise Tax became effective on January 1, 2023. The Internal Revenue Services (the “IRS”) issued initial guidance describing future Treasury Regulations expected to be promulgated regarding the Excise Tax that, when finalized, are expected to be effective retroactive to the beginning of 2023. That initial guidance is contained in Notice 2023-2. (the “Notice”). Among other changes and clarifications, the Notice substantially expands the scope of Canadian corporations that may be subject to the Excise Tax. Prior to the publication of the Notice, it was anticipated that only Canadian corporations subject to the “anti-inversion” rules of Code Section 7874 or that effected stock repurchase transactions directly through “specified affiliates” (defined for these purposes as includes any U.S. corporation or partnership which is more than 50 percent owned, directly or indirectly, by the Canadian parent corporation and certain non-U.S. partnerships that have a U.S. entity as a direct or indirect partner) would be subject to the Excise Tax on such repurchase transactions. Pursuant to the Notice, if a specified affiliate funds, or is treated as funding, by any means (including through distributions, debt, or capital contributions) a share repurchase transaction of a Canadian corporation by the Canadian corporation or certain other specified affiliates, and if the “funding” is undertaken for a principal purpose of avoiding the Excise Tax, the “funding” specified affiliate will be subject to the Excise Tax with respect to the share repurchase transaction as if it had completed the repurchase transaction directly. For these purposes, the fair market value of stock treated as acquired by the “funding” specified affiliate is limited to the amount funded by the “funding” specified affiliate. And, for these purposes, a specified affiliate will be deemed to have a principal purpose of avoiding the Excise Tax if such specified affiliate funds by any means (other than a distribution) a share repurchase transaction within two years of such funding. The following is an example that illustrates this new “funding” rule. X is a publicly-traded Canadian corporation with one wholly-owned U.S. subsidiary corporation, Y. X is not subject to the anti-inversion rules of Code Section 7874. X redeems directly $20 million worth of its issued and outstanding stock. Within the two years prior to such repurchase: (i) Y paid X $10 million as repayment of principal with respect to certain intercompany debt obligations owed to X; and (ii) Y also paid X a dividend in the amount of $5 million. Y didn’t otherwise pay or distribute any other amounts to X in the two years preceding the share repurchase transaction. Pursuant to the funding rule, Y would be deemed to have had a principal purpose of avoiding the Excise Tax in connection with such share repurchase transaction completed by X insofar as the $10 million paid to X. Y would also be treated as funding an additional $5 million of the share repurchase transaction by X if it were determined that the $5 million dividend was paid with a principal purpose of avoiding the Excise Tax. Assuming that the $5 million dividend was not paid with a principal purpose of avoiding the Excise Tax, Y would be subject to an excise tax of $100,000 (1% of $10 million - the amount of X’s share repurchase transaction deemed to be funded by Y under the “funding” rule) as a result of X’s share repurchase transaction. Many Canadian companies with U.S. subsidiaries or affiliates may be inadvertently subjecting their U.S. subsidiaries or affiliates to the Excise Tax in connection with share repurchase transactions. The scope of transactions deemed to constitute a share repurchase transaction for purposes of the Excise Tax is considerably broad (including, without limitation, certain acquisitions of Canadian corporations, recapitalizations or other exchanges by shareholders of a Canadian corporation for new, different or a different number of shares of such Canadian corporation, changes to a Canadian corporation’s province of incorporation, split-offs and certain other distributions effected by Canadian corporations, and certain liquidations of Canadian corporations). The U.S. Treasury Department is accepting comments in response to the Notice until March 20, 2023. It is expected that Treasury Regulations will be proposed sometime thereafter. Subject to the promulgation of Treasury Regulations, Canadian corporations with U.S. subsidiaries or affiliates or otherwise subject to the anti-inversion rules of Code Section 7874 that directly or indirectly repurchase stock or otherwise engage in various corporate transactions (including, without limitation, those listed above) should seek advice to avoid or limit the potential application of the Excise Tax.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022, HR 5376 (the “Act”), into law. Among other significant changes, the Act includes a new 1% excise tax on stock repurchase transactions by certain publicly traded corporations (the “Excise Tax”). As described below, publicly traded Canadian companies that: are treated as U.S. corporations for U.S. federal income tax purposes under the anti-inversion rules in Code Section 7874(b); became treated as “surrogate foreign corporations” for U.S. federal income tax purposes on or after September 20, 2021 under the anti-inversion rules in Code Section 7874(a)(2)(B); or are not subject to the anti-inversion rules but that effect a stock repurchase through one or more of its U.S. subsidiaries or affiliates, will each likely be subject to the Excise Tax. Under the Excise Tax, subject to certain exceptions discussed below, a “covered corporation” is subject to a 1% excise tax on the fair market value of certain stock “repurchased” during the covered corporation’s taxable year, irrespective of whether any such repurchase is part of an open-market stock buyback program. For these purposes, a “covered corporation,” includes any U.S. corporation, any Canadian or other non-U.S. corporation treated as a U.S. corporation for U.S. federal income tax purposes pursuant to the anti-inversion rules under Code Section 7874(b), and any Canadian or other non-U.S. corporation that became deemed a “surrogate foreign corporation” pursuant to the anti-inversion rules under Code Section 7874(a)(2)(B) on or after September 20, 2021 (and, only for the applicable ten-year period thereafter as contemplated by Code Section 7874(d)(1)), in any case whose stock is traded on an established securities market (e.g., NASDAQ, NYSE, TSX, LSE, etc.) irrespective of the market capitalization of such corporation. The Excise Tax also applies to a covered corporation if its stock is repurchased by a “specified affiliate”, which includes any corporation or partnership which is more than 50 percent owned, directly or indirectly, by the covered corporation. In addition, U.S. corporations and partnerships (which, for these purposes, includes a Canadian or other non-U.S. partnership with a direct or indirect U.S. entity as a partner) that are “specified affiliates” of Canadian parent corporations, including Canadian parent corporations not otherwise subject to the anti-inversion rules, will also be subject to the Excise Tax upon the repurchase of stock of its Canadian parent corporation if: (i) the Canadian parent corporation has stock traded on an established securities market, and (ii) such U.S. domestic corporation or partnership is a “specified affiliate” of the Canadian parent corporation. Further, the reductions to the Excise Tax with respect to stock issuances during the taxable year, as described below, are limited to those made by such specified affiliate to its employees. In computing the Excise Tax, the fair market value of stock repurchased is reduced by the fair market value of any stock issued by the covered corporation during the taxable year, including any stock issued or provided to an employee of such corporation (including upon exercise of an employee stock option), or to an employee of a “specified affiliate” (as defined above) of such corporation. The Excise Tax applies at a fixed rate without regard to whether such covered corporation has taxable income or loss during the taxable year. For these purposes, a “repurchase” includes a redemption of stock within the meaning of Code Section 317(b), as well as any transaction determined by the Secretary to be economically similar to a redemption of stock within the meaning of Code Section 317(b). Code Section 317(b) provides that stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired or held as treasury stock. Accordingly, redemptions subject to the Excise Tax may include an acquisition by a covered corporation: (i) of its own stock for cash, regardless of whether such purchase is made on the open market or in a private transaction, (ii) to effectuate a “bootstrap acquisition” or a leveraged buyout, and (iii) of fractional shares for cash in an acquisition. Subject to further guidance from the IRS and U.S. Treasury Department, because the Excise Tax only applies to a repurchase of “stock”, the repurchase of an unexercised option or warrant not otherwise treated as a stock for U.S. federal income tax purposes is not anticipated to be subject to the Excise Tax. Further guidance from the Secretary will be necessary to determine the precise scope of the Excise Tax. The Act provides that the Excise Tax will not apply to a stock repurchase transaction: to the extent that the repurchase is part of a reorganization (within the meaning of Code Section 368(a)) and no gain or loss is recognized on such repurchase by the shareholder by reason of such reorganization; in any case in which the stock repurchased, or an amount of stock equal to the value of stock repurchased is, contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan; in any case in which the total value of the stock repurchased during the taxable year does not exceed U.S.$1,000,000; under regulations prescribed by the Secretary, in cases in which the repurchase is by a dealer in securities in the ordinary course of business; to repurchases by registered investment companies or real estate investment trusts; or to the extent that the repurchase is treated as a dividend for tax purposes. The new Excise Tax applies to repurchases effected after December 31, 2022. No grandfathering rule currently applies to stock repurchase transactions already authorized or approved. Subject to the promulgation of additional guidance and Treasury Regulations, Canadian corporations described above that directly or indirectly repurchase stock, utilize cross-border equity financing structures or engage in cross-border acquisitions should seek advice to avoid or limit the potential application of the Excise Tax.

More special purpose acquisition vehicles (common known as “SPACs”) completed their initial public offering (“IPO”) in 2021 than in any prior year. In 2021, approximately 613 SPACs completed their IPO within the United States alone. An increasing number of Canadian companies are being approached by U.S. and tax haven SPACs with significant US shareholders. A SPAC is organized with no business operations and minimal direct assets (cash raised from private investors in the IPO is held in a trust account) for the purpose of acquiring a private company, effectively resulting in that company being taken public. Such acquisition is generally referred to as a “qualifying transaction” (or “de-SPAC” transaction). Private companies generally find de-SPAC transactions attractive because they can result in significant cash infusions and access to public markets while avoiding the complications of a direct IPO. Common de-SPAC transaction structures include: (i) re-domiciling the SPAC to Canada prior to the acquisition of the Canadian company; (ii) acquiring the Canadian company utilizing an exchangeable share structure; (iii) structuring the de-SPAC transaction as an acquisition of the SPAC by the Canadian company; or (iv) forming a new Canadian holding company to acquire the SPAC and the Canadian company. The re-domiciling of a SPAC to Canada will generally result in application of the U.S. anti-inversion tax rules unless the SPAC is organized in a non-U.S. jurisdiction. If the anti-inversion rules apply, the SPAC will continue to be classified as a U.S. domestic corporation for U.S. federal income tax purposes notwithstanding the re-domiciliation to Canada. As a result, U.S. SPACs are generally not re-domiciled to Canada. Properly designed exchangeable share structures whereby the SPAC acquires an interest in the Canadian company and shareholders of the Canadian company receive shares exchangeable for SPAC shares can result in the deferral of taxes by shareholders of the Canadian company until they liquidate their holdings. However, the use of exchangeable share structures often adds cost, time and complexity. The acquisition of a SPAC by the Canadian company, or a newly-formed Canadian corporation organized to acquire both the SPAC and the Canadian company, can result in tax-deferral for the shareholders of the Canadian company and the SPAC if certain detailed requirements are met including, with respect to a direct acquisition of the SPAC by the Canadian company, that such Canadian company have been engaged in an active trade or business (as defined for U.S. federal income tax purposes) for the 36 months preceding the acquisition of the SPAC. Ultimately, the de-SPAC transaction structure to be utilized depends on the particular facts applicable to the Canadian company, the SPAC and their respective shareholders. Involving U.S. tax counsel early in the discussion process can make the de-SPAC transaction process more efficient and avoid unforeseen U.S. tax issues.

Many Canadian companies and individuals own U.S. real property interests through a U.S. corporation. The Foreign Investment in Real Property Tax Act (“FIRPTA”) regime imposes a withholding tax (currently at a rate as high as 15%) on the gross proceeds realized by Canadians upon the sale or transfer of a U.S. real property interest. This withholding is imposed without regard to whether the disposition results in a taxable gain.  However, with advance planning, this withholding may be reduced or eliminated. A U.S. real property interest (“USRPI”) generally includes land, buildings, growing crops and timber, and mines, wells and other natural deposits (including oil and gas properties and mineral deposits) located in the United States and equity interests in a “United States real property holding corporation” (“USRPHC”) as well as certain interests in a USRPI-owning partnerships (subject to certain “look-through” rules). A U.S. corporation (or entity classified as a U.S. domestic corporation for U.S. federal income tax purposes) will generally be a USPRHC if, at any time during the prior 5 year period, the fair market value of its USRPIs equals or exceeds 50% of the aggregate fair market value of (a) such corporation’s USRPIs, (b) such corporation’s interests in foreign real property, and (c) such corporation’s other assets that are used or held for use in a trade or business. If shares in a USRPHC are sold or transferred by a Canadian in certain tax-deferred transactions (as determined for U.S. federal income tax purposes), certain certification and filing requirements must be satisfied to avoid FIRPTA withholding. If that sale or transfer is made pursuant to a taxable transaction (as determined for U.S. federal income tax purposes), FIRPTA withholding may be reduced (or eliminated) by filing an IRS Form 8288-B if the actual tax due on the “built-in gain” in the shares of the USRPHC is less than 15% of the gross sale proceeds (or if the shares are in a built-in loss position). To be effective, an IRS Form 8288-B must be completed, signed, and filed with the IRS prior to the effective time of the sale or transfer. In order to be complete, the form must generally contain: (i) the U.S. taxpayer identification number of the transferor and the transferee; (ii) a description of the USRPI being transferred; (iii) the fair market value of the USRPI being transferred and evidence supporting the same (which, in some cases, requires an independent third-party appraisal); and (iv) the transferor’s adjusted tax basis in the USRPI being transferred. If the Canadian transferor does not have a U.S. taxpayer identification number, it will need to obtain one. Completing an IRS Form 8288-B often requires advanced planning. Canadian companies and individuals holding shares in a USRPHC (or USRPIs) may be able to significantly reduce the U.S. withholding taxes to which they are subject by planning ahead and timely filing an IRS Form 8288-B.

On Thursday, November 4, 2021, the Office of the Superintendent of Financial Institutions announced that, subject to approval by the superintendent, Canadian banks and other financial institutions may begin repurchasing their own shares. Share buyback transactions by Canadian companies are not novel. However, the U.S. federal income tax treatment of U.S. shareholders participating in a share buyback transaction with a Canadian corporation can often be surprising. Depending on the U.S. shareholder’s particular circumstances, the tendering of shares of a Canadian corporation for cash pursuant to a share buyback transaction will generally either be treated as a “sale or exchange” of such U.S. shareholder’s shares or as a “distribution” by the Canadian corporation in respect of such U.S. shareholder’s shares. Under Code Section 302, after applying certain constructive ownership and attribution rules, a U.S. shareholder whose shares are sold back to the issuing Canadian corporation for cash will generally be treated as having engaged in a “sale or exchange” of such shares if the transaction: has the effect of a “substantially disproportionate” distribution by the Canadian corporation with respect to such U.S. shareholder; results in a “complete termination” of such U.S. shareholder’s equity interest in the Canadian corporation; or is “not essentially equivalent to a dividend” with respect to such U.S. shareholder. Each of the tests above generally considers the proportion of shares of the Canadian corporation the U.S. shareholder holds immediately prior to, and (if any) immediately after, the share buyback transaction either based upon the aggregate issued and outstanding shares of the Canadian corporation or the shares actually and constructively held by each U.S. shareholder individually. Provided certain holding period and other requirements are satisfied, a U.S. shareholder that is deemed to “sell or exchange” their shares of a Canadian corporation may be eligible for the lower, more favorable, capital gains tax rates. If the U.S. shareholder is deemed to receive a “distribution” with respect to its shares, such U.S. shareholder would generally recognize, as ordinary income, a dividend equal to the amount of any distribution paid on the shares, without reduction for any Canadian taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of the Canadian corporation’s current or accumulated “earnings and profits” as determined for U.S. federal income tax purposes. If the distribution exceeds the Canadian corporation’s earnings and profits, the U.S. shareholder’s tax basis in its remaining shares would then be reduced (but not below zero) with any then remaining excess generally treated as capital gains. However, many Canadian corporations do not maintain calculations of their current and accumulated earnings and profits in accordance with U.S. federal income tax principles. In those instances, U.S. shareholders deemed to receive a “distribution” pursuant to a share buyback transaction may be required to treat the entirety of the proceeds received as a taxable dividend subject to ordinary income tax rates. The U.S. federal income tax consequences of share buyback transactions are different for Canadian corporations classified as “passive foreign investment companies” for U.S. federal income tax purposes. In the U.S., recent legislative proposals have included an excise tax, at a rate as high as 2%, on share buyback transactions for public companies in the U.S. It remains uncertain whether any such tax will be adopted and, if adopted, what scope of publicly traded corporations will be subject to that tax.

In transactions in which a Canadian corporation seeks to acquire a U.S. target entity for shares of the Canadian acquiror in a transaction intended to be tax-deferred for U.S. federal income tax purposes, the ability of U.S. shareholders of the U.S. target to qualify for tax-deferral may depend on the activities the Canadian acquiror conducts in Canada (or other non-US jurisdictions). Under the general rule in Code Section 367(a), if a U.S. person transfers stock in a U.S. corporation to a Canadian corporation (as characterized for U.S. federal income tax purposes), such transfer will not be characterized as a tax-deferred exchange for U.S. federal income tax purposes (even if the transaction would otherwise qualify as a tax-deferred exchange). There are a number of exceptions (and exceptions to the exceptions) to the general rule contained in Code Section 367(a). One of the most important exceptions is the “Active Trade or Business Exception”, which applies where the Canadian corporation directly, or through certain qualified subsidiaries: (i) is engaged in an active trade or business in Canada (or other non-US jurisdiction) for the entirety of the 36-month period immediately prior to the transaction; (ii) at the time of the transaction, has no intent to dispose of or discontinue such trade or business; and (iii) has a fair market value which is substantial as compared to the U.S. target corporation. The Active Trade or Business Exception can be critical to achieving tax-deferral for U.S. owners of U.S. target companies. Each component of the Active Trade or Business Exception is subject to complex rules and interpretations. Even if the Active Trade or Business Exception is satisfied, if an owner of the U.S. target would own, directly, indirectly or pursuant to certain attribution rules, 5% or more of the outstanding voting power or value of the Canadian corporation immediately after the exchange, the exchange will generally be taxable to such U.S. target owner unless that person enters into a “gain recognition agreement” with the Internal Revenue Service. A gain recognition agreement is an agreement whereby a U.S. target owner agrees that if a “gain recognition event” occurs within a five-year period following the initial transfer, such U.S. target owner will also recognize at the time of such “gain recognition event” the gain that existed in their equity holdings at the time of the initial transfer. Code Section 367(a) also does not generally apply to any transfer of property by a U.S. person to a Canadian corporation which is, or will be immediately after such transfer, treated as an “inverted corporation” (i.e., a U.S. domestic corporation for U.S. federal income tax purposes) under Code Section 7874(b). The business activities, employee headcount, and employee compensation of the Canadian acquiring corporation in Canada will also generally be relevant in determining whether a Canadian corporation is, or will be immediately after such an exchange, an “inverted corporation”. Because determining whether tax-deferral may be available for U.S. shareholders of a U.S. target company can have a significant impact on structure, pricing and other material transaction terms, it is best for Canadian corporations evaluating acquisitions of U.S. target companies to analyze as early as practical whether the Active Trade or Business Exception (or any other exception under Code Section 367(a)) may be available.

Generally, an “inversion” is a transaction in which a non-U.S. corporation directly or indirectly acquires substantially all of the properties held by a U.S. corporation or partnership, after which the former owners of that U.S. corporation or partnership are in control of the acquiring non-U.S. corporation. Inversion transactions can take many different forms.  Over the years, inversion transactions have continually drawn scrutiny, perceived to be transactions pursuant to which a U.S. company effectively changed its domicile to a non-U.S. jurisdiction and, accordingly, reduced its U.S. income tax liability. In response, Congress enacted the anti-inversion rules under Code Section 7874 as a means of discouraging inversion transactions and preserving the U.S. tax base. Under Code Section 7874, if a non-U.S. corporation (the “non-U.S. acquiror”) acquires, directly or indirectly, substantially all of the assets of a U.S. corporation or U.S. partnership (the “U.S. domestic target”), and the former owners of the U.S. domestic target hold stock in the non-U.S. acquiror constituting at least 80%, by vote or value, of all issued and outstanding stock of the non-U.S. acquiror after the transaction by reason of their ownership in the U.S. domestic target, then the non-U.S. acquiror will be treated as a U.S. domestic corporation for U.S. federal income tax purposes. If stock constituting at least 60%, but less than 80%, of the aggregate voting power or value of the non-U.S. acquiror is held by the former owners of the U.S. domestic target after the transaction by reason of their ownership in the U.S. domestic target, then the non-U.S. acquiror is generally respected as a non-U.S. corporation, but it would thereafter be subject to various disadvantages for U.S. federal income tax purposes for a period of 10-years after the inversion transaction. Code Section 7874 and the Treasury Regulations and administrative guidance promulgated thereunder contain a number of exceptions and additional rules applicable to determining whether an inversion transaction has occurred. For example, shares issued by the non-U.S. acquiror in a public or private financing which is related to the acquisition are disregarded in determining what percentage of the non-U.S. acquiror is owned by former owners of the U.S. domestic target. An “inversion” transaction in which the non-U.S. acquiror is treated as a U.S. domestic corporation for U.S. federal income tax purposes may have certain benefits, including permitting its acquisition of the U.S. domestic target to constitute a tax-deferred transaction (if the requirements applicable to the acquisition structure are met) and permitting future tax-deferred acquisitions of other U.S. companies. On April 7, 2021, the U.S. Department of Treasury released a report outlining the Biden Administration’s “Made in America Tax Plan” (the “Plan”). As part of the Plan, the Biden Administration proposed to expand the existing anti-inversion rules. Under the Plan, a non-U.S. acquiror that acquires a U.S. domestic target would be treated as a U.S. domestic corporation for U.S. federal income tax purposes if either (i) the former owners of the U.S. domestic target hold stock of the non-U.S. acquiror constituting 50% or more (presumably by vote or value, although the Plan is not specific in that regard) of the non-U.S. acquiring corporation after the transaction by reason of their ownership in the U.S. domestic target, or (ii) the non-U.S. acquiror is subsequently managed and controlled from within the United States. It remains uncertain whether the Plan will be enacted into law and, if so, what anti-inversions may be included in ultimately enacted legislation.

Canadian persons and entities owning a significant interest in a U.S. corporation or U.S. entity classified as a “disregarded entity” for U.S. federal income tax purposes should ensure they are compliant with IRS Form 5472 filing requirements to avoid substantial U.S. federal income tax penalties. IRS Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business” must be filed by: (i) any U.S. corporation which has a Canadian shareholder that owns, directly or indirectly, 25% or more of the voting power or value of that corporation; (ii) any U.S. entity classified as a “disregarded entity” for U.S. federal income tax purposes that has a Canadian owner; and (iii) any Canadian corporation engaged in a U.S. trade or business within the United States; provided, in each case, that a “reportable transaction” occurs. The scope of “reportable transactions” requiring the filing of IRS Form 5472 is very broad, and generally includes, without limitation, capital contributions, intercompany debt financing arrangements and other transactions that have the potential to reduce U.S. federal income tax liabilities or result in assets being transferred to, or distributed from, the entities listed above. The failure to file penalty for Form 5472 is $25,000, which may be increased by an additional $25,000 to the extent the Form is 90 days late. An additional $25,000 penalty may be assessed each 30 days thereafter. The U.S. federal income tax rules implementing Form 5472 also require the maintenance of certain records in accordance with applicable regulations. The failure to maintain those records in the prescribed manner may also be assessed a penalty of $25,000. Certain Canadian owners of the entities listed above may also have IRS Form 5471 (a form similar to IRS Form 5472) or other reporting obligations, which may also be subject to significant failure to file penalties. The timely filing of these often overlooked IRS Forms is critical to avoiding substantial IRS penalties.

An often overlooked exception to U.S. withholding taxes may result in a lower overall U.S. tax burden. The Foreign Account Tax Compliance Act (“FATCA”) was enacted in an effort to ensure that U.S. taxpayers could not avoid U.S. federal income tax on investment income through the use of non-U.S. accounts or entities. FATCA requires that certain foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”) comply with information reporting requirements intended to identify U.S. account holders or U.S. owners. FFIs generally include banks, investment companies or similar financial institutions, and certain non-U.S. trusts while NFFEs generally include any entity that is not a financial institution. Under FATCA, a withholding agent that does not obtain proper documentation from its beneficial owners as required for compliance with applicable FATCA reporting requirements (e.g., an IRS Form W-9, W-8BEN, W-8BEN-E or other applicable form) is generally required to withhold 30% of a withholdable payment to an FFI or NFFE. For these purposes, a “withholdable payment” is defined as (i) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income (collectively, “FDAP Income”), if such payment is from sources within the United States, and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States (e.g., capital gains of stock of a U.S. corporation). However, in December of 2018, Treasury issued Proposed Regulations which would remove gross proceeds from the definition of a “withholdable payment”, and thereby eliminate the withholding requirements on gross proceeds described in (ii) above. The Preamble to the Proposed Regulations noted that financial institutions faced significant administrative burdens in complying with such withholding requirement for gross proceeds and that it was no longer necessary given widespread compliance with the FATCA regime. While these Proposed Regulations have yet to be finalized, the Preamble provides that taxpayers may generally rely on the Proposed Regulations until such time that final Treasury Regulations are issued. Accordingly, only payments of U.S.-source FDAP Income are currently subject to FATCA withholding and reporting requirements.

A Canadian which holds a partnership interest in a U.S. or non-U.S. partnership that has “effectively connected income” (“ECI”) is subject to U.S. tax withholding with respect to the Canadian partner’s allocable share of the partnership’s ECI.  That withholding tax must be remitted by the partnership to the IRS irrespective of whether any distributions are made by the partnership in that tax year and irrespective of the Canadian partner’s ultimate U.S. federal income tax liability for that tax year.  For this purpose, a “partnership” includes any entity classified as a partnership for U.S. tax purposes, including a limited liability company or “LLC” classified as a partnership. ECI generally includes all income from U.S. sources that is connected with the conduct of a U.S. “trade or business”. The term “trade or business” generally includes the performance of personal services, but also includes and excludes specific types of activities. The determination of whether activities rise to the level of constituting a trade or business requires specific analysis. Canadian partners in partnerships with ECI will be required to obtain a U.S. taxpayer identification number and to file a U.S. federal income tax return, as the activities of a partnership constituting a trade or business will be attributed to the Canadian partner. A Canadian partner will generally be eligible to claim a credit for their share of the ECI withholding tax remitted by the partnership in determining their aggregate U.S. tax liability. Accordingly, the withholding tax is not an additional tax. In addition to the foregoing, a Canadian which transfers or disposes of an interest in a partnership with ECI is generally subject to a 10% U.S. withholding tax, unless an exception applies. Exceptions to the 10% U.S. withholding tax generally assessed against transferors of interests in U.S. partnerships will be discussed in a subsequent blog post.

The IRS has released a new webpage dedicated to the marijuana industry to help growers, processors, researchers and retailers understand and comply with their U.S. federal income tax responsibilities. The IRS Marijuana Industry webpage covers numerous topics that may be relevant for businesses directly engaged in, or related to, the cultivation, processing and sale of marijuana, including, without limitation, common U.S. federal income tax filing obligations, options for satisfying U.S. federal income tax liabilities, and penalties which will be assessed if such payment obligations are not satisfied on a timely basis. Perhaps of most significance, the IRS Marijuana Industry webpage also contains a series of FAQs including information on a number of common questions, including the potential application of Section 280E of the U.S. Internal Revenue Code to taxpayers in the marijuana industry. The IRS webpage dedicated to the Marijuana Industry can be accessed at: https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry

The CARES Act, signed into law on March 27, 2020 in the wake of the onset of the Covid-19 pandemic, contained numerous changes to U.S. federal income tax law. One such change applied to the deductibility of net operating losses (“NOLs”). Legislation enacted in December 2017 commonly known as the “Tax Cuts and Jobs Act” (the “TCJA”) prohibited the carrying back of NOLs to prior tax years and limited the amount of NOLs which could be deducted in any particular tax year to 80% of a corporate filer’s taxable income. Reversing course, Section 2303 of the CARES Act delayed the effective date of certain limitations in the TCJA by allowing a corporate taxpayer’s NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to be carried back to the five years preceding the taxable year of such loss. In addition, the CARES Act eliminated the taxable income limitation applicable to the deductibility of NOLs for tax years beginning after December 31, 2017 and before January 1, 2021 (with additional rules applying to tax years beginning after January 1, 2021). Recent SEC filings suggest that SEC-registered companies anticipate receiving refunds, in the aggregate, in excess of $5 billion. Due to the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the TCJA, some corporate taxpayers may benefit significantly more than others, due to the ability to carry NOLs back to tax years in which a higher U.S. federal income corporate tax rate applied. Other corporate taxpayers may be unable to fully, or even partially, utilize accumulated NOLs due to not having taxable income in the five tax years preceding the year of a particular loss. NOL provisions in merger and acquisition agreements should be carefully analyzed in the wake of the CARES Act to ensure that the potentially significant benefits from the ability to carry back NOLs are appropriately negotiated.

Current closures at the Internal Revenue Service (“IRS”) have caused significant delays in obtaining an Employer Identification Number (“EIN”) for some U.S. businesses formed by Canadians, including new U.S. subsidiaries formed by Canadian companies. An EIN is a nine-digit number that the IRS assigns to businesses, which is necessary for many essential tasks, including making U.S. federal tax filings, hiring employees, or opening and maintaining a U.S. bank account. Applicants with a “U.S. Responsible Party” (i.e., a CEO, CFO, or President with a U.S. Social Security Number or Individual Taxpayer Identification Number) are generally able to obtain an EIN through the IRS’ online application portal, which remains open. Most applicants lacking a U.S. Responsible Party must submit their applications to the IRS via telephone, fax, or mail. However, due to the COVID-19 outbreak, the IRS has temporarily closed its EIN call center, fax lines, and mail-processing center. Accordingly, applicants lacking a U.S. Responsible Party may not be able to obtain an EIN until the IRS reopens one of these channels. As the IRS has not yet indicated when such reopening might occur, applicants lacking a U.S. Responsible Party are left with only one course of action. These applicants can submit a Form SS-4 via certified mail to the IRS for processing when the IRS reopens its mail-processing center. In doing so, such applicant can attest to having “applied for” an EIN and provide the official date of its application (being the date the application was mailed). While an EIN submitted via certified mail will generally be processed in the order received, the actual processing of the application will not begin until the IRS reopens its mail-processing center. In the ordinary course of business, the EIN-by-mail process can take up to one month. However, given the ongoing uncertainty surrounding COVID-19, the actual processing time of EIN applications submitted via certified mail may be far longer.