April 6, 2016, No. 2016-18. Many Canadian companies with U.S. operations will be affected by new U.S. tax regulations just issued. These regulations affect not only "inversions", as reported in the media, but also common financing transactions between Canadian and U.S. companies in the same corporate group. In particular, the regulations will affect whether debt instruments are considered debt or equity for U.S. tax purposes.
The U.S. Treasury Department and the IRS released proposed regulations on April 4, 2016 concerning the tax treatment of certain U.S. corporations and U.S. partnerships with assets that are directly or indirectly acquired by a non-U.S. corporation and certain persons related to the U.S. corporations and U.S. partnerships (i.e., inversions).
In proposed regulations issued concurrently with the inversions guidance, the U.S. Treasury has introduced new U.S. thin capitalization rules significantly expanding the number of financing instruments which will be denied treatment as debt for U.S. tax purposes.
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