Canadian firms takeover targets due to lower taxes
U.S.-based companies seek relief
TORONTO — Canada’s taxes are the most businessfriendly in the world, according to a new report from KPMG — a fact that may grab the attention of businesses looking for takeover targets.
The “Focus on Tax” report ranked developed countries by adding up a wide range of tax costs to businesses — from statutory labour costs to harmonized sales tax — and comparing them to what companies pay in the U.S.
Not only was Canada ranked No. 1 in the world, but Toronto, Vancouver and Montreal took the top three spots for tax-competitive major international cities.
Recent high-profile tax inversions, or cross-border takeovers motivated by companies looking to cut costs by shifting their incorporation to a country with lower taxes, have annoyed U.S. lawmakers to the point where Congress is considering a bill to make it harder for companies to change addresses abroad. Medical device maker Medtronic Inc. became the latest in this wave of transactions when it agreed on Sunday to buy Covidien Plc for $42.9-billion US. Valeant Pharmaceuticals International Inc. and Actavis Plc are some other big names that have pursued tax inversions.
Sharon Geraghty, a senior partner in the mergers and acquisitions group of Torys LLP, said she’s seeing increased interest in U.S. companies looking to use a Canadian acquisition as a stepping stone to an inversion. A U.S. company that merges with a Canadian target company for share consideration can avoid U.S. residency for tax purposes as long as the shareholders of the Canadian target end up owning at least 20 per cent of the shares of the new parent immediately after the acquisition.
“People are definitely kicking the tires of transactions in Canada that would assist them in doing inverse transactions,” Geraghty said. She said an acquisition “is just naturally going to be a time in a company’s life when they think about, ‘Where do I want to be? Which jurisdiction?’ It gives you an opportunity to do that.”
Christopher Steeves, who leads Fasken Martineau DuMoulin LLP’s global tax group and often works on the tax component of mergers and acquisitions, said taxes are just one factor companies take into account when considering takeover targets. But when you combine Canada’s lower corporate taxes with the employee health benefit costs U.S. companies can cut in a country with public health care, the perks add up, he said.
“When I first started practising law, I remember a lot of successful Canadian businesses trying to figure out ways to migrate out of Canada, because they felt the corporate tax rates were so oppressive. Many of them moved to the U.S.,” Steeves said. “And now, 15 or 20 years later, it’s completely switched, where you’re seeing a lot of U.S. businesses leaving the U.S. and coming to Canada.”
Some of those businesses may have their sights set on an acquisition in Toronto, which the KPMG report named the most tax-competitive major city in the world. Roberto Rossini, deputy city manager and chief financial officer of the City of Toronto, said the city’s top international ranking is the result of years of hard work to keep taxes low.