Cross-border M&A deals between Canada and the US: Opportunities and Challenges

Cross-border M&A deals between US and Canadian-based companies add complexity to the M&A process as well as the post-acquisition operation and integration of the target. Yet, with the right advisors, both US and Canadian-based companies can expand their growth prospects through acquisitions, widen their markets, and diversify risk by exploring cross-border M&A.

But before you start here are some items to consider:
​
1. Understand the tax implications: Tax rules on cross-border profit distributions via dividends, royalties, or interest payments are regulated by the Canada-US Tax Treaty which outlines the rules for determining any requirement for withholding taxes. Generally, the treaty provides for a zero withholding tax rate on dividends paid by a Canadian subsidiary to its US parent if the US parent directly or indirectly owns at least 80% of the voting power and value of the shares of the Canadian subsidiary for a specified period. On the other hand, the general withholding tax rate on dividends paid by a US subsidiary to a Canadian parent is 15%. However, if the Canadian parent owns at least 10% of the voting shares of the US subsidiary, the withholding tax rate may be reduced to 5%. The specific rate and conditions may vary depending on the specific provisions of the tax treaty and the circumstances of the payment.

The tax treaty between Canada and the US, as well as the domestic tax laws of both countries, treat outbound and inbound dividends and other income distributions differently.
 
There are also significant differences in corporate income tax rates.  Canadian Controlled Private Corporations (CCPC) are taxed at much lower rates than non-CCPC companies and this lower tax rate status is lost if more than 50% of the company is US owned.

Companies need to consult with tax professionals to ensure there is a clear understanding of the countries’ tax laws and regulations, before pursuing a cross-border M&A strategy.

2. Regulatory and Legal Differences: The US and Canada have different regulatory and legal frameworks, but often operate under similar principles. Nevertheless, cross-border M&A deals must navigate these differences, including antitrust laws, securities laws, and labour laws.  These can vary by State or Province as well as at the Federal level.

For example, the acquisition vehicle options for M&A in Canada and the US are somewhat similar, but there are some key differences. It's important to note that the choice of acquisition vehicle will depend on various factors, including tax considerations, the nature of the transaction, and the goals of the parties involved. While Canada does not have LLCs and S-Corps, in some cases they can own Canadian subsidiaries but there may be many legal and tax considerations that need to be taken into account.  Often, US-based acquirers set up Canadian ULCs (Unlimited Liability Company) for their Canadian acquisitions as flow-through entities, however, there may be important differences in liability protection that needs to be considered.

Like the tax implications, it's important to consult with a lawyer and an accountant who has expertise in cross-border business transactions before proceeding.

3. Employee benefits and healthcare: The main differences between employee benefits costs to companies in Canada versus the US may vary depending on the specific benefits, but some general differences are:

a) Healthcare: In Canada, healthcare is largely publicly funded and administered by the government, while in the US, healthcare is largely private and employer-sponsored. This can result in higher healthcare costs for US companies.  Canadian companies often also offer health and benefit insurance that is either cost-shared with employees or paid by the employer to cover extended health care (dental, drug coverage, etc.) and other non-publicly funded health care costs.

b) Retirement benefits: In Canada, employers are required to contribute to the Canada Pension Plan (CPP) or other retirement plans (such as the QPP in Quebec), while in both the US and Canada, employer-sponsored retirement plans such as 401(k)s, or group pension plans are common, but not required.

c) Paid time off: Canadian employees are generally entitled to a minimum of two weeks of paid vacation per year (however paid time off rules vary by Province), while in the US, there is no federal requirement for paid vacation.

d) Parental leave: Canadian employees are entitled to a longer period of paid parental leave compared to the US, with up to 18 months of leave in some Provinces, while in the US, the Family and Medical Leave Act (FMLA) provides up to 12 weeks of unpaid leave.

e) Taxes: Canadian companies may face higher payroll taxes and employment insurance costs, while US companies may have higher healthcare and insurance costs.
It's important to note that these differences may not apply to all companies and industries and that regulations and benefits can vary by province and state within each country.

4. Currency Fluctuations: Currency exchange rates can significantly impact the value of cross-border M&A deals. Changes in exchange rates can create significant financial risks for companies on both sides of the border, when reporting income is in the “home” currency.  However, for businesses with already a significant commercial presence in the other country, acquiring operating business with expenses in the “importing” country can act as a hedge against significant currency fluctuations, Luckily, both Canada and the US have relatively stable economies (when compared to many other countries) and currencies.

5. Foreign Investment Regulations: In the US, foreign companies must comply with the rules and regulations set by the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign investments that could potentially pose a threat to national security. In Canada, foreign companies must comply with the Investment Canada Act (ICA), which regulates foreign investment in a wide range of sectors and activities.

Both countries also have specific rules for mergers and acquisitions involving foreign companies, particularly those that could result in a significant loss of Canadian or US ownership or control. These rules are designed to protect national security and ensure that foreign investments do not compromise the integrity of key industries or pose a risk to national interests.

6. Integration Challenges: Cross-border M&A deals require effective integration strategies to realize the potential benefits. Successful integration requires alignment of business processes, culture, and technology. Sometimes companies fail to understand the differences in many of the operating regulations that are specific to each country.  For example, in Canada, many consumer products like food must have both French and English labels.  Despite the existence of a free trade agreement between Canada and the US, there also may be tariffs or other trade restrictions that may limit raw material supplies or trade in finished goods.

Cross-border M&A deals between Canada and the US offer significant opportunities notwithstanding these and other considerations. There are extensive business and cultural linkages between the two nations, and their economies are heavily linked. These connections can give businesses access to new markets, clients, and technological advancements. Cross-border M&A transactions can also aid businesses in scaling up operations and improving their position as industry leaders.
​
In conclusion, cross-border M&A transactions between the US and Canada offer both opportunities and obstacles. Regulatory, legal, cultural, and financial risks related to the transaction as well as the post-acquisition and integration plan must be carefully considered by businesses before a cross-border acquisition is pursued. But, with the proper planning, strategy, and advisors, cross-border M&A can offer important advantages and aid businesses in achieving their growth goals.

---