How much can my company borrow from its foreign parent?
Commercially, as much as the parent is willing to advance. For tax the question is a different one: how much of the interest on that debt the borrower can actually deduct. The cap is set by the capital structure, measuring what is owed to the specified shareholder against the equity contributed, and interest on the excess simply sits outside the deduction. Separately, transfer pricing asks whether an independent lender would have advanced that much to this borrower at all. The two questions overlap but they are not the same, and both are asked.
What interest rate should I charge on a loan between my companies?
The rate an independent lender would have charged this borrower for this loan. That means comparable borrowings, and comparable does real work in that sentence: similar security, similar term, similar currency, and a borrower of similar financial standing. A rate lifted from the parent's own bank facility usually fails on at least one of those, because the parent borrows on different security and often in a different currency. The analysis is about matching the circumstances of the borrowing, not finding a rate that looks reasonable in the abstract.
Why is our interest expense denied when we actually paid it?
Because payment and deduction are decided by different rules. The thin-capitalisation cap looks at the capital structure and denies the deduction for interest above the limit regardless of whether it was paid, accrued or reinvested. Transfer pricing can deny part of it again by finding the rate exceeded what an independent lender would have charged. So the first question after a denial is which of the two produced it, because the answer decides whether the remedy is a change of capital structure or a change of rate, and confusing them wastes a year.
Does a parent guarantee change the rate on an intercompany loan?
It changes what the borrowing actually is, so it changes the comparables. A loan supported by a parent guarantee is a different credit from the same loan without one, and the comparable borrowings you test against have to reflect that. Groups often want the benefit both ways, pricing as though the borrower stood alone while relying on group support in practice. The file should say plainly what support exists, what form it takes, and how the comparables were selected in light of it, because that choice is the part an examiner will look at first.
Can I refinance the intercompany loan to fix the problem?
Refinancing can change the structure going forward, and that is worth doing where the current arrangement produces interest that cannot be deducted year after year. It does not repair periods already closed, because the cap applied to those periods on the capital structure that existed then. Before refinancing, be clear which of the two tests was failing. If the problem was the amount of debt, a new agreement at a better rate changes nothing. If the problem was the rate, refinancing at a supported rate helps but leaves the structural cap exactly where it was.
Can a loan pass one test and still lose the deduction?
Yes, and that is the outcome groups are least prepared for. A modest, well-supported rate does nothing for a borrower whose debt sits far above what its equity will carry, because the cap applies to the quantum of interest however reasonable the rate is. Equally, a borrower with a conservative capital structure can still lose part of its deduction if the rate is above what comparable borrowings would bear. The tests are cumulative rather than alternative. Run both before the agreement is signed, because the structure is much harder to change once the money has moved.
Which business structure has double taxation?
The corporation — specifically a US C corporation, where profit is taxed to the company and the dividend again to the shareholder. Sole proprietorships, partnerships and LLCs treated as flow-throughs are taxed once, in the owners' hands. Across borders that tidy answer breaks: an entity treated as a flow-through in one country can be opaque in the other, which produces a mismatch neither system planned for. See LLC against corporation for Canadians.
What is OECD Pillar Two?
A global minimum effective tax for large multinational groups, delivered through top-up taxes rather than a single global rate. Where a group's effective rate in a jurisdiction falls below the agreed minimum, the shortfall is collected — by the parent jurisdiction under the income inclusion rule, by the source jurisdiction under a domestic top-up, or as a backstop by other jurisdictions. Canada has enacted implementing legislation. The compliance burden is data, long before it is tax. See BEPS and Pillar Two.
