A double take on double-dips
by Andy Yap

Double-dipping not only violates dining etiquette, it also breaches fair game rules — at least according to Finance Minister Jim Flaherty.

The 2007 federal budget proposed the International Tax Fairness Initiative, a plan that promised to update and improve the existing 35-year-old system of foreign-affiliate taxation, albeit with a series of controversial measures. One such measure proposed a severe restriction on the deductibility of interest paid on debt used to invest in foreign affiliates. Essentially, this means that Canadian-based multinational corporations would be forbidden to deduct interest incurred making acquisitions in foreign countries.

This rather disturbing measure survived for a mere 55 days. Faced with an onslaught of criticism, the Finance Minister backtracked and lifted the interest deductibility restriction from all international financing considerations. All, that is, except one: the double-dip strategy, which is widely used by Canadian multinational corporations expanding abroad. Simply put, a corporation double-dips when it gets an interest deduction in Canada and in the foreign jurisdiction — from the same financing arrangement.

To Flaherty, the double-dip structure is an inherently unfair tax avoidance scheme. His revised proposal states that, beginning in 2011, the Canada Revenue Agency (CRA) will deny interest deductions in Canada if they are associated with foreign tax savings arising from double-dip structures. For greater certainty, the CRA will also deny interest expense and other borrowing costs payable after 2010 for an investment in a foreign affiliate, to the extent they can be attributed to a double-dip. Furthermore, all borrowed funds, whether from arm's-length lenders or otherwise, will be subject to the new rules.

It remains to be seen whether the revised proposal will survive four more years of criticism — after all, it took less than two months to quash the original. Nevertheless, Flaherty's message for Canadian-based multinational corporations is abundantly clear: avoid double-dip financing activities because the government is committed to shutting them down. So, feel free to perform a double take the next time you witness a double-dip — to some, not only is it rude, it's also inherently unfair.

Andy is a Tax Partner, specializing in Canadian and international tax issues. He can be reached at (416) 644-4427 or by e-mail at andy_yap@mintzca.com.

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