Canadian unlimited liability companies ("ULCs") have been used by US-resident investors into Canada for a variety of reasons, including to finance Canadian activities. The benefit from the use of ULCs results from their hybrid nature. Although viewed as normal corporate bodies in Canada, ULCs may be fiscally transparent in the US if certain conditions are met. Moreover, payments received from ULCs by a resident of the US, such as interest and dividends payments, generally benefit from reduced withholding tax rate under the Canada-US Tax Convention (the "Treaty").

As of January 1, 2010 new anti-hybrid rules will come into force and seriously jeopardize the tax effectiveness of structures using fiscally transparent ULCs. Following the provisions of new paragraph IV(7)(b) of the Treaty, payments received from fiscally transparent ULCs may loose the benefit of the reduced withholding tax rates under the Treaty and be subject to the general 25% Canadian domestic withholding tax rate.

As a consequence, there may the a trend to interpose a foreign intermediary in current structures into Canada. This foreign intermediary could be formed in a favorable treaty country as a replacement to or as a holding company for a ULC. Hybrid instruments may also prove to be an interesting alternative. These instruments may take various forms but essentially the intent is to receive equity treatment on the US side of the border and debt treatment on the Canadian side. Other alternatives may also be considered, including "unchecking" the box for US purposes so that a ULC is not fiscally transparent anymore in the US or restructuring the flow of funds so that payments originating from ULCs are paid to affiliates of the US-resident investors in a third country with a favorable tax treaty with Canada.

US-resident investors into Canada should consider reorganizing their activities in order to avoid, or at least minimize, the impact of these anti-hybrid measures while taking into consideration the tax consequences of such reorganizations both in Canada and in the US.