Cross-Border M&A (Canada-US)

Why a Canada-US deal is not just a bigger domestic deal

The mechanics of a cross-border acquisition look superficially similar to a domestic one — letter of intent, due diligence, definitive agreement, closing. The substance is different at almost every stage once the deal crosses the Canada-US border. Two sovereign tax systems both want to tax the same income, and the order in which they get to do it is governed by the Canada-United States Income Tax Convention (the treaty). The treaty allocates primary taxing rights over particular income streams — dividends, interest, royalties, capital gains, business profits — and those allocations interact with each country's anti-deferral and integration regimes: the foreign-affiliate and foreign-accrual property income (FAPI) rules in Canada, and Subpart F together with the rebranded global-minimum-tax regime in the United States.

Choices made in the first two weeks of structuring define the after-tax outcome for years — sometimes for the life of the combined business. A structure that is tax-efficient for the seller can strand the buyer with permanent leakage on every dollar repatriated; a structure that is clean on day one can become a compliance and double-tax problem the first time the acquired business pays a dividend, takes on intercompany debt, or licenses its own intellectual property back across the border. The cost of getting it wrong is rarely a penalty — it is a quietly worse effective tax rate that nobody priced into the purchase agreement. This page walks through the recurring issues in Canada-US deals and how Barrett Tax Law approaches them.

Asset deal vs. share deal — and the rollover question

The first structural fork is the same one every deal faces, but the cross-border overlay changes the math on both sides.

Where a Canadian buyer acquires a US target, the asset-versus-share trade-off has its usual contours. An asset deal gives the buyer a stepped-up basis in the acquired assets and fresh depreciation and amortization, but the US seller typically pays tax twice — once at the entity level on the asset sale and again at the shareholder level on the distribution of proceeds. A section 338(h)(10) election can synthesize an asset purchase out of what is legally a stock purchase, delivering the buyer's coveted basis step-up at a single level of US tax, but it is only available in specific fact patterns (broadly, where the target is an S corporation or a subsidiary in a consolidated or affiliated group) and requires a willing, eligible seller. A related section 338(g) election is available to a foreign purchaser of a target's stock in narrower circumstances. The Canadian buyer's ultimate position turns on what happens after closing: whether the US business will distribute profits back to Canada, and at what treaty withholding cost.

Where a US buyer acquires a Canadian target, the Canadian side offers section 85 rollover treatment when the consideration includes shares of the acquirer (or a Canadian acquisition vehicle), and sections 86 and 87 govern reorganizations and amalgamations. The hinge for US-resident shareholders rolling over their Canadian shares is whether the US characterizes the same transaction as a tax-deferred section 351 exchange or a section 368 reorganization. If the two systems do not line up, a Canadian shareholder can defer Canadian tax while triggering US tax on the same exchange, or vice versa — a mismatch that has to be modelled, not assumed away.

How the after-tax outcome actually gets decided: repatriation and withholding

Most of the long-run tax cost of a cross-border deal is not the tax on the acquisition itself — it is the cost of getting cash back to the parent afterward. Under Article X of the treaty, dividends from a subsidiary to a parent that owns at least 10% of the voting stock are generally subject to a reduced 5% withholding rate; the rate for portfolio (smaller) shareholdings is generally 15%. Those rates only apply if the recipient satisfies the treaty's limitation-on-benefits article (Article XXIX A), which polices treaty-shopping by testing whether the entity claiming the benefit has a genuine connection to its country of residence. Inserting a holding company in a third country to chase a better rate usually fails this test and can forfeit the treaty entirely.

Interest and royalties carry their own treaty rates and their own traps — thin-capitalization limits in Canada, the interest-deductibility limits under US section 163(j), and anti-hybrid rules in both countries that can deny a deduction where the same payment is treated inconsistently across the border. The point for deal structuring is simple to state and easy to miss: model the full repatriation path before you sign, not after.

Branch profits tax, Subpart F, and the new global-minimum regime

A Canadian acquirer that continues to operate a US business through a US branch rather than a US subsidiary is exposed to the branch profits tax under IRC section 884 — a second-level US tax, levied at a statutory 30%, designed to mimic the dividend withholding that would have applied had the same profits been earned in a US subsidiary and paid up to the Canadian parent. The treaty reduces this branch tax to 5% and exempts roughly the first C$500,000 of cumulative branch profits, but only for a qualifying treaty resident, and only if the position is actually claimed on a US return. Branch structures can be efficient for an early-stage or loss-generating US operation; they become expensive once the branch turns durably profitable, which is exactly when integration planning tends to lapse.

A US acquirer of a Canadian target inherits a controlled foreign corporation (CFC), and with it an annual US compliance and inclusion burden that does not exist when you own a US subsidiary. Three things drive that burden. First, Subpart F still requires US shareholders to include certain passive and mobile income of the CFC currently, whether or not it is distributed. Second, the regime formerly known as GILTI was renamed Net CFC Tested Income (NCTI) under the 2025 One Big Beautiful Bill Act, and the changes are not just cosmetic: effective for tax years beginning after December 31, 2025, the calculation no longer reduces tested income by a return on tangible assets (the old QBAI deduction is gone), so more of a CFC's active income is swept into the current US inclusion. Third, the section 250 deduction against NCTI was cut from 50% to 40%, lifting the headline effective US rate on this income to roughly 12.6% (21% on the 60% that remains taxable), before foreign tax credits.

The credit side moved at the same time: the haircut on the indirect foreign tax credit for taxes the CFC paid abroad was eased, so up to 90% of those foreign taxes (rather than 80%) may now be creditable for corporate shareholders and individuals who make a section 962 election. Because Canada's combined corporate rate generally sits well above the threshold at which the credit fully shelters NCTI, a US buyer of a profitable Canadian operating company is often in a manageable position — but the analysis is fact-specific and changed materially in 2026, so any modelling built on the old GILTI numbers should be re-run. These figures reflect US law as of 2026 and remain subject to legislative change.

Treaty residency of the surviving entity

Cross-border combinations regularly produce an entity that is resident in both countries under each country's domestic test — incorporated in one but managed from the other, for example. Article IV of the treaty breaks the tie for companies by reference to the country of incorporation, and where that does not resolve it, by mutual agreement of the two competent authorities — a slow, discretionary process. The treaty residency of the surviving entity decides which country has the primary right to tax its worldwide profits, which on a large transaction can swing the deal economics by an amount that dwarfs the legal fees. This is something to design for at the structuring stage, not to discover during the first post-closing audit.

Section 116 clearance — the closing-date bottleneck

If the Canadian target's shares are taxable Canadian property (TCP) — which is common, particularly where more than half of the company's value derives from Canadian real property, resource property, or timber at any time in the preceding 60 months — section 116 requires CRA clearance for each non-resident seller. Without a clearance certificate in hand at closing, the purchaser is statutorily obligated to withhold and remit 25% of the gross purchase price (not 25% of the gain) and is personally liable for it. The certificate process runs on CRA's timetable, not the deal's, and it routinely sets the practical outer limit on the closing date. The discipline is to file the section 116 application early and build the lead time into the deal calendar from the first draft of the timetable. We cover the mechanics in depth on our section 116 clearance page.

Common traps we see in Canada-US deals

• Pricing the deal on a domestic effective tax rate. The purchase model assumes profits come home for free. Treaty withholding, branch tax, or an NCTI inclusion quietly raises the real rate.
• Hybrid mismatches. An instrument or entity treated as debt/transparent in one country and equity/opaque in the other can lead to a denied deduction or a double inclusion under anti-hybrid rules on both sides.
• Transfer pricing on integration. Post-closing intercompany services, IP licences, management charges, and financing must be priced at arm's length and documented contemporaneously, or they invite adjustment, penalties, and economic double tax.
• Treaty positions assumed rather than claimed. Reduced withholding, the 5% branch rate, and treaty residency relief are not automatic — they require correct forms, limitation-on-benefits eligibility, and disclosure.
• US-situs estate exposure for individual sellers and rollover shareholders. A Canadian who ends up holding US-situs assets (including shares of a US corporation) can have US estate-tax exposure. The US estate-tax exclusion is US$15 million per person for 2026 and was made permanent (with indexing) under the 2025 legislation, but a Canadian's protection runs through a prorated treaty credit, not the full exclusion. See our US estate tax for Canadians page.
• Late section 116 filing compressing or blowing the closing date and forcing a 25% gross holdback.
• FATCA and information-reporting gaps surfacing in diligence — unfiled FBARs, Forms 5471/8865/8858, or T1134/T1135 — that become the buyer's problem post-closing.

How Barrett Tax Law approaches a cross-border deal

Deal engagements at Barrett Tax Law combine cross-border tax structuring with the firm's Canadian M&A and corporate work, led on the cross-border side by Simone Barrett, who is admitted in both Ontario and Florida. We work alongside US deal counsel — typically counsel admitted in the US state where the target operates — so that the Canadian and US positions are designed together rather than reconciled after the fact. In a typical file we map the structure options early, model the after-tax outcome of each (including the full repatriation path, branch versus subsidiary, and the Subpart F / NCTI profile), run the tax due diligence on the target's prior cross-border filings, draft the tax representations, covenants, and indemnities in the definitive agreement, and manage the section 116 clearances and CRA-side post-closing filings. Where the deal touches US real property, departing shareholders, or estate exposure, we coordinate with the relevant practice areas so nothing falls between the two systems.

If you are scoping a Canadian acquisition of a US business, a US acquisition of a Canadian company, or a cross-border merger, we offer a free initial consultation to walk through the structure and the tax considerations before the letter of intent is signed. You can start from our cross-border tax hub, or read related pages on FIRPTA for Canadian sellers, departure tax planning, FATCA and FBAR compliance, and business sales and acquisitions, or our blog guide on cross-border US real estate ownership.

This page is general information, not legal or tax advice. Cross-border tax outcomes depend on the specific facts of the transaction and on the rules of both Canada and the United States, both of which change. Tax figures and rates stated here reflect our understanding as of 2026 and should be confirmed for your transaction before you rely on them.