With tightness in the deal market, we are seeing creativity seep into investment strategies. Examples include pursuing more aggressive carve-out initiatives, making bolder investments in the lower middle-market, and investing in Canada or in companies with significant subsidiaries in Canada.
Why Canada? Here are a few data points:
- Canada is the world’s 11th largest economy, with a 2012 nominal GDP of approximately $1.8 trillion USD, according to the World Bank
- They are a part of the North American Free Trade Agreement and the Asia-Pacific Economic Cooperation (APEC) forum, which seeks to promote free-trade and economic cooperation throughout the Asia-Pacific region
- Canada has a stable banking system and, according to Forbes Magazine, is one of the best countries in the G20 in which to do business
- Canada has a highly-educated workforce; the OECD stated that in 2011, 51% of Canada’s adult population held a post-secondary qualification, the highest rate among OECD countries
For those new to considering Canada as a place to invest, keep the following in mind:
- In 2011, Canada adopted International Financial Reporting Standards as Canadian GAAP. Generally speaking, IFRS is considered to be more “principles based” than U.S. GAAP, which is considered to be more “rules based.” IFRS proponents argue that this allows for more judgment and the ability to apply GAAP in a manner more consistent with the facts and circumstances of a situation. In addition, there is a heavier emphasis on fair value accounting than currently seen under U.S. GAAP.
- The concept of “employment at will,” prevalent in many U.S. states allowing employers to unilaterally terminate employment without having to prove cause, effectively does not exist in Canada.
- The federal government levies a consumption or value-added tax, called the GST or Goods and Services Tax, of 5%, which is applicable to almost all “supply” of goods and services throughout the value chain. Additionally, each province administers a Provincial Sales Tax, or PST, ranging from 0% in Alberta to 9.975% in Quebec. In five provinces, the GST is combined with provincial taxes to constitute the HST or Harmonized Sales Tax. This differs from the U.S. where only sales taxes are generally applicable. Before investing, be sure you know the “tax laws” of your region/province.
- In carrying on business in Canada, particular attention should be given to the issue of Transfer Pricing as it relates to the pricing of goods and services transferred between non-arm’s length entities. Particular areas of focus are management fees, royalties, and interest charges on inter-company debt. Be sure to have well-documented and defensible transfer pricing policies that are consistent with how transactions would be conducted with arm’s length entities.
- Quebec is the only province in Canada to have French as its official language, and is the only province to be considered a Civil Law jurisdiction as opposed to Common Law, which applies everywhere outside of Quebec. If you plan to do business in Quebec, be aware that there are measures to protect the distinct French culture.
Commentary by Mike Mannella, Director at CMF Associates, Vancouver, British Columbia, Chartered Professional Accountant
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