Strictly Speaking: Separate Corporate Entities in Emergis Inc. v Canada  

  • 15 juin 2023
  • Andrea Daly, associate, EY Law LLP


In one of its most recent tax decisions, Emergis Inc. v. Canada, 2023 FCA 78, the Federal Court of Appeal (the “FCA”) was unwilling to adopt the broad interpretation of the Tax Court of Canada (the “Tax Court”) applied to subsection 20(12) of the Income Tax Act (the “Act”) regarding foreign non-business income tax. The FCA declined to read look through rules into subsection 20(12) where the language did not explicitly provide for its application. Further, the FCA clarified that taxpayers may take advantage of multiple forms of relief where the statutory requirements are met.   

This outcome is a welcome one for taxpayers, as it indicates that the FCA defers to the explicit wording of Parliament, not taking a broad interpretive approach where not accounted for in the Act. This is in line with the judicial trend in tax cases, which are increasingly grounded in the context of the relevant provision and deferential to taxpayers in the face of uncertainty.


Canadian company Emergis Inc. (“Emergis”) financed a US acquisition through a “tower structure”[1], where the applicable entities receive different tax treatments for US and Canadian income tax purposes.

The primary entities involved in the underlying tax appeals were:

  • the US General Partnership (“USGP”) incorporated under the laws of Delaware and in which Emergis held a 99.9% interest,
  • the Nova Scotia Unlimited Liability Corporation (“NSULC”) which was wholly owned by USGP, and
  • the Limited Liability Company (“LLC”), the relevant foreign affiliate incorporated by NSULC under the laws of Delaware.   

As part of the acquisition, Emergis lent USGP $267M USD with interest payable (the “Emergis Loan”). USGP then used funds from the Emergis Loan to subscribe for shares in NSULC. NSULC included dividends received from LLC in its income and claimed a deduction under subsection 113(1) of the Act, as the LLC dividends were paid out of an exempt surplus. USGP allocated 99.9% of its net income, including the LLC dividends paid to NSULC and interest expenses paid on the Emergis Loan, to Emergis. Emergis claimed a deduction per subsection 112(1) of the Act for the allocated amount of USGP’s net income with respect to the LLC dividends, and also claimed a subsection 20(12) deduction for the withholding taxes paid on the interest to the US tax authorities.