National Post (Latest Edition)

Private equity risks a hit on interest-deduction cap

- Kevin Orland

The budget unveiled by Prime Minister Justin Trudeau’s government on Monday includes a tax provision that could affect enterprise­s that rely heavily on debt financing, including private-equity firms and natural-resource companies.

The change affects tax deductions that certain businesses can take for the interest they pay on loans. Trudeau’s government wants to limit those deductions to an amount equal to 40 per cent of a company’s earnings starting in 2023, and 30 per cent after that. It estimates the measure would raise $5.3 billion in additional revenue over five years.

The measure is meant to prevent companies from minimizing their tax burden by having their Canadian units hold a disproport­ionate amount of debt. Several other countries in the G7 and EU are introducin­g similar limits on interest deductibil­ity.

“This strengthen­ing of the rules on interest deductibil­ity will ensure that large companies pay their fair share and bring Canada in line with other jurisdicti­ons, including all our G7 peers,” the budget proposal said.

Private-equity and real estate firms rely heavily on debt financing for acquisitio­ns, and miners and oil producers borrow heavily to pay for capital projects. The measure wouldn’t affect firms with less than $15 million of taxable capital employed in Canada or net interest expenses of $250,000 or lower.

Interest expenses above the cap could be carried forward for as long as 20 years or backward for as long as three years. Because the proposal is based on net interest expenses, it would exclude financial institutio­ns like banks and insurance firms, which typically earn more income from interest than they pay out in expenses. The government said it would consider “targeted measures” to address concerns of excessive interest deductions by banks and insurers.

The budget also proposes measures to tighten controls over so-called “hybrid mismatch arrangemen­ts” that multinatio­nals use to exploit difference­s between Canadian and internatio­nal tax laws.

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