September 2011


Canada is an attractive market for U.S. corporations seeking to increase their natural resource reserves, partner with an innovative Canadian technology company or perhaps commence their international expansion without venturing too far from home.

Happily, being purchased by a U.S. corporation is often the principal exit strategy for owners of a Canadian business. And where the U.S. acquirer, or USco, has attractive growth prospects, the Canadian sellers frequently wish to exchange their shares of the Canadian target for shares of the buyer in order to ride the U.S. company's future growth.

However, Canadian sellers have a tax problem that will quickly become the problem of the U.S. acquirer. Unlike purely Canadian share exchange transactions where sellers receive shares of the acquirer on a tax-deferred "rollover" basis resulting in tax payable only when the sellers eventually sell the shares of the acquirer, the rollover is not available where shares of USco are the consideration. In such cases, the sellers have a capital gains tax obligation and, even worse, may have to sell the U.S. acquirer share consideration to pay the tax. On this basis, the transaction may fail. A sudden failed transaction is definitely not a pleasant surprise.

But there is a solution: an exchangeable share transaction. 

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