Previously, under certain conditions, an administrative practice of the CRA allowed the elimination of the deemed dividend if the amount of the primary adjustment was repatriated to the Canadian Corporation. The budget proposes to codify this administrative practice into legislation. These proposals will apply to transactions that occur on or after March 29, 2012.
In addition, thin capitalization rules would be amended under the new fiscal budget. These rules address the deductibility of interest payments a Canadian resident pays to certain non-residents for debts owing that exceed twice the amount of the corporation’s equity. The budget proposes to reduce the debt-to-equity ratio from 2-to-1 to 1.5-to-1. This change would apply to corporate taxation years that begin after 2012.
Source: Ceteris Transfer Pricing Times Volume IX, Issue 4