Corporate Measures

Thin Capitalization

The thin capitalization rules limit the deductibility of an interest expense of a Canadian resident corporation in respect of debts owing to a specified non-resident shareholder generally where the debt to equity ratio in respect of debts owing to specified non-residents exceeds a ratio of 2-to-1. A specified non-resident is generally a non-resident person owning shares representing more than 25% of the votes or value of the corporation alone or together with any other non-resident that does not deal at arm’s length with a specified shareholder. The Advisory Panel on Canada’s System of International Taxation recommended the reduction of the debt to equity ratio. Budget 2012 reduces the debt to equity ratio for this purpose to 1.5-to-1.