Magazine article CMA - the Management Accounting Magazine

Moving from a Canadian Sub to a Branch of a Foreign Corporation

Magazine article CMA - the Management Accounting Magazine

Moving from a Canadian Sub to a Branch of a Foreign Corporation

Article excerpt

With the advent of globalized economies and free trade blocs (i.e., through the Canada-U.S. Free Trade Agreement and proposed North American Free Trade Agreement), multinational corporations are always searching for new ways to minimize taxes on an international scale. In last month's column, we evaluated the issues to consider when a non-resident initially invests in Canada (i.e., as a branch of a parent company or a separately-incorporated Canadian subsidiary). In this article, we evaluate the issues to consider when moving from a Canadian subsidiary to a branch operation as part of an overall rationalization of a multinational organization.

Assume that "USCo," a U.S. corporation, owns "CanCo," a manufacturing subsidiary located in Ontario. USCo is profitable but CanCo has a history of losses and is becoming increasingly dependent on USCo for financing. In such a situation, USCo may consider transferring the Canadian operations to a branch of USCo, as it will allow USCo to: stem the tide of losses in CanCo and permit future losses to be utilized against USCo's income; eliminate the impact of the thin capitalization rules which restrict the deduction of interest on debt owing to non-resident shareholders and related parties; and permit greater flexibility in transferring funds between USCo and the Canadian operations; and potentially eliminate withholding taxes on intercompany/international charges.

In principle, the transfer of Canadian operations from CanCo to USCo would involve either the sale of all or part of the assets of CanCo to USCo or a wind-up of CanCo into USCo. Under either scenario, USCo is left with business operations in Canada in the form of a branch. The branch will be required to file a Canadian tax return and report the appropriate amount of income and expenses allocated to Canada. If the Canadian branch continues to record losses, these losses can be utilized against the parent company's income for U.S. tax purposes.

As part of the sale of assets and the establishment of the branch, certain tax issues must be considered:

Since CanCo and USCo are not dealing at arm's-length, all asset sales must be at fair market value. As well, any business disposition should also account for the sale of the accumulated goodwill. In many situations, the "fair market value" of goodwill and other assets may be difficult to estimate. …

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