Tax inversions feed Canadian law firms

In tough legal market, new clients are to be mined in relocating US head offices

From accepting US draft dodgers in the 1960s, Canada has moved in more recent times to accepting US corporate tax refugees. The most recent example? Texas-based Waste Connections Inc., which is buying Canada’s Progressive Waste Solutions Ltd. and relocating the parent company to Ontario.

Burger King used a tax inversion in its purchase of Tim Horton’s and so did Valeant Pharmaceuticals in its acquisition of Biovail Corp., to name a couple more.

For corporate law firms struggling with a shrinking client pool there is work to be mined – not just in structuring the transaction but also in doing the ongoing legal work for the former US head office.

“When foreign companies make Canada their domicile that definitely creates opportunities for developing new client relationships – and that’s good for business here,” says Emmanuel Pressman, co-chair of the corporate department at Osler, Hoskin & Harcourt LLP.

“It’s a potential cause for celebration when a new issuer comes into Canada, there’s no question about it.”

There is a question, however, about how long inversions will be allowed to continue.

US companies fleeing to cheaper tax regimes are costing the US Treasury hundreds of billions in lost tax revenue.

The Obama administration put new anti-inversion tax rules into effect in late 2014 prohibiting things like the use of third-country parents, for example. While some predicted the new rules would stop the exodus of corporate headquarters in its tracks, it hasn’t.

Along with the recent Waste Management deal, Johnson Controls announced last week it is acquiring Irish rival Tyco International and moving its head office to Cork. The Johnson Controls deal was the 13th such deal in 16 months, according to the New York Times.

Canadian law firms still are seeing interest in the structure despite the US clampdown, says Geoffrey Belsher, managing partner of Blake Cassels & Graydon LLP in New York.

“We continue to get a lot of inquires about inversions from strategic advisors and financial advisers, and some of our clients are still looking at inversion-type transactions.

“The new rules are fairly narrow now on when you can do them. You really have to thread the needle to be able to make it work but, as you see with Waste Management, it’s possible.”


Threading the needle is not proving that daunting, generally requiring nothing more than a strategic acquisition.

“We’ve seen investment banks parading around with decks to show companies what miracles they can wreak,” says Sharon Geraghty, an M&A partner at Torys LLP in Toronto. “They do the math on a couple of strategics that might be good partners to see if the inversion might work, might fit, then they come with a list and say: ‘You should pretty yourself up to be a target. Here are a bunch of companies you can do this with.’ They try to sell it to targets and acquirers.”

In fact, the US clampdown may actually drive tax inversions Canada’s way, according to Peter Keenan, a US tax lawyer at Torys in New York.

He says Canada can thank the 2014 rules for landing Waste Management, for example.

“If the deal had been done at this time last year, the two companies probably would have be combining under an Irish holding company instead of a Canadian parent,” he says.

If US companies are all ears when investment bankers come calling, it’s not just because of higher US tax rates.

It’s also because the US imposes tax on a corporation’s worldwide income, meaning profits from a foreign subsidiary are taxed again by the US when repatriated, subject to some credits.

While Canada is not as attractive as Ireland or the Netherlands from a straight tax perspective, it has other advantages, Pressman says.

“We’re an attractive country in which to invest given political, economic and capital-market conditions. Our current currency valuations, our currency markets, also make Canada a place to capitalize on from a buyer’s perspective, and the low interest-rate environment in the Canadian credit markets makes acquisition financing favourable.

“So there are a lot of reasons to come besides tax but if you can squeeze more juice out of the orange as a consequence of the inversion structure, then all the more value you create for shareholders.”

Still, inversions remain highly emotional in the US, with President Barack Obama calling them “unpatriotic.”

The two Democratic party front-runners have slammed them. Hillary Clinton says she’d block deals like Johnson Controls and Tyco, and place an exit tax on corporations that leave the country for tax reasons. “These efforts to shirk US tax obligations leave American taxpayers holding the bag while corporations juice more revenues and profits,” she has said. Sen. Bernie Sanders called the two companies “corporate deserters.”

As for further clampdowns, the US Treasury says it’s gone as far as its powers permit in limiting inversions. Anything more requires a change to the statue.

Keenan says a change is considered unlikely as long as the Senate or House of Representatives is controlled by Republicans, who see lower corporate taxes and limits on taxing foreign profits as the way to counter the flight to lower-tax destinations.

In the meantime, he says, the talk on Wall Street is that there are many more inversions to come.

“I think you’re going to see a steady stream of inversions until the rules change. From what I read there are a dozen deals in the pipeline, companies that feel they almost need to do it to stay competitive.”

Canadian law firms and advisers will be keeping their fingers crossed that at least some of them are headed north.