CLIH Cross border Issues

26 www.canadianlawyermag.com/inhouse FEATURE MAINTAINING TAX efficiency and mitigating tax risk for the organization are vital components of any transaction involving mergers and acquisitions, financing or corporate restructuring. During the last two years, private equity activity has been very active in Canada, creating a wealth of tax issues that can crop up, many of which are unique to individual transactions. "It has been a very robust period of activity on M&A private equity investment financing," Evolving tax regulations present challenges at times of transition Lawyers navigate complex tax challenges during M&A, financing and corporate restructuring transactions says James Morand, partner at Bennett Jones LLP. "Private equity investors are consoli- dating businesses in particular industries." This activity level is partly due to changes in the marketplace arising from the pandemic, Morand says. Businesses facing credit crunch or reduced demand for a product or service created opportunities for competitors and strategic buyers, for example. Keeping on top of evolving tax regulations and ensuring compliance to minimize risk can be challenging for in-house counsel, so legal departments often seek the expertise of external counsel partners to assist with complex tax matters. "From an M&A perspective, you're concerned about potential tax liabilities of the target entity that arise through tax due diligence, and more importantly, the liabilities that you're not aware of through tax due diligence," says Adrienne Oliver, partner at Norton Rose Fulbright Canada LLP. In-house counsel should also consider tax costs in the target assets or shares. A vital part of the role of tax lawyers is to work with in-house counsel who may not have a lot of M&A experience. External counsel can articulate the concerns that came out of due diligence, or which the internal tax team raised, and find a way to mitigate those risks. The first significant risk with M&A is the tax liability in the target company that the purchaser will inherit, Oliver says. "The way to address that is through due diligence, then through reps and warranties, and indemnities and pullbacks," she says. Tax insurance is also becoming a lot more popular, mainly where there is a potential exposure for which neither the vendor nor the purchaser wants to take responsibility. Oliver warns of another pitfall that sometimes crops up on the vendor side: A transaction creates "dry income," meaning that cash fails to match an income inclusion. Managing tax risk throughout any transaction is critical to maintain tax efficiency and to ensure compliance. "There is often a tension between opposing sides of the transaction which can show itself or affect tax results to the advantage of one side and to the detriment of the other," says Morand. Preparing for the possibility of scrutiny from tax authorities is also essential. Oliver advises in-house counsel to seek tax advice from the transaction's outset and "There is often a tension between opposing sides of the transaction which can show itself or affect tax results to the advantage of one side and to the detriment of the other." James Morand, Bennett Jones LLP

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