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Refocus and restructure keywords for 2009

|Written By Kelly Harris

Lower corporate taxes, an increase in re-structuring, and a return of mergers and acquisition markets are all possibilities for 2009, say tax lawyers.

In changing from a boom economy to the realities of a recession, corporations and tax lawyers will need to refocus and employ strategies that may have not been as common in the past couple of years.

“I think 2009 is going to be a busy year for tax lawyers,” says Ron Richler, a partner specializing in tax law for Blake Cassels and Graydon LLP in Toronto.

“I know that some of the younger guys are worried, they just went through a number of very strong M&A years and they are worried with the economic downturn, but we’ve been through economic downturns before and there is always work for tax lawyers, it’s just different kinds of work.”

This year Richler expects to see corporations using a number of different strategies to relieve their debt burdens. The application of these strategies could open new business opportunities for lawyers.

One such way is through paying debt through the issuing of preferred shares — distressed preferred shares.

Generally corporations that issue these types of shares to help relieve their debt burden will seek an advance ruling on whether they meet Income Tax Act guidelines. This may open up new business opportunities for lawyers.

Of course when there are companies in debt due to a downturn in the economy, there are opportunities for those companies to be swallowed up by the healthier variety. This can lead to opportunistic buying, says Andrew Fleming, a senior partner specializing in business law with Ogilvy Renault LLP in Toronto.

“Organizations will be severely undervalued even if they are financially solvent and strong,” says Fleming. “There will obviously be opportunities in the area of the walking wounded as it were, the finically unstable, companies in financial difficulty.

“There will be other issues that M&A lawyers haven’t spent a lot of time on in the past.”

One such issue is acquiring a company through restructuring; weeding out the failing elements, and only taking over those parts of companies with a chance for success.

“You don’t necessarily want to buy all the bad stuff, but you might want to buy the good stuff, so there is plenty of room for some creative thinking in that area,” says Fleming.

Both Fleming and Richler agree one area that could have a major effect on corporations in 2009 is the reduction of corporate taxes in Canada. Richler says lawyers are eagerly awaiting this month’s federal budget. The expectation is for personal tax cuts, but corporate tax reductions could be on the way as well.

Richler says Canada has become a more attractive place to invest due to the steady decline of corporate tax rates during the past decade. Ten years ago, the combined federal and provincial corporate tax rate in Ontario was 45 per cent. Today that rate is 33 per cent and is set to drop to 29 per cent.

“When I tell my U.S. clients this, they are actually usually pretty surprised, they remember Canada as being a very high-taxed jurisdiction,” Richler says. “We also used to have capital taxes that are being eliminated or being phased out, one of my clients, when he heard that, said that Canada is becoming a quasi-tax haven.”

Fleming says he wouldn’t quite go so far as to call Canada a tax haven — even the quasi variety — but he agrees that foreign investment due to a decrease in tax rates is a very real possibility. He mentioned a recent business trip to the Middle East where there are investors not facing the same liquidity crunch that North American investors are facing.

“You talk to them about investing in Canada and one of the things they say is ‘ya, but your taxes,’” says Fleming. “So bring those down and I think it is inevitable that there will be increased interest from external other sources in investing in Canada.”

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