Key Regulatory and Tax Changes Impacting Private Capital Funds

As private capital funds continue to evolve, investors must navigate an increasingly complex environment shaped by significant tax reforms, regulatory shifts and compliance requirements. Below are five key developments and considerations for stakeholders:

1. Alternative Minimum Tax Amendments: Recent amendments to the alternative minimum tax (AMT) introduce an increase in the AMT rate (from 15% to 20.5%) and adjustments to the capital gains inclusion rate (from 80% to 100%). The amendments also include a disallowance of 50% of deductions for interest on money borrowed to acquire property. This heightened tax burden could impact investors’ after-tax returns, making proactive tax strategy adjustments essential.
2. Clean Electricity Investment Tax Credit: The Clean Electricity Investment tax credit now allows certain tax-exempt entities to claim credits, promoting partnerships between taxable Canadian corporations and tax-exempt entities, such as First Nations, municipal or pension investment corporations. In these partnerships, a partner can claim the investment tax credits allocated by the partnership based on the partner’s eligibility; for example, a taxable partner could claim its share of the credit as a clean technology investment tax credit at a regular credit rate of 30% while the tax-exempt partner could claim its share of the credit as a clean electricity investment credit at a regular credit rate of 15%.
3. Increasing Pension Fund Investments in Canada: The Canadian government is creating a working group led by Stephen Poloz, the former Governor of the Bank of Canada, to explore how to catalyze greater domestic investment opportunities for Canadian pension funds. This working group will focus on several areas, such as investments in certain asset classes and the removal of the “30% rule” for domestic investments. 
4. Economic Sanctions: Canada’s economic sanctions regime imposes restrictions on dealings with specific jurisdictions, individuals and entities. These sanctions apply to all persons and entities within Canada, Canadian citizens and corporations abroad. Canadian sanctions include list-based prohibitions and sectoral sanctions, which restrict dealings with certain economic sectors and activities. 
5. Compliance and Enforcement: Compliance with Canada’s sanctions regime requires ongoing diligence, including periodic screening against multiple lists. In cases where a designated person controls another entity, Canadian sanctions restrictions also extend to the controlled entity. Non-compliance is an offence attracting criminal liability, making robust compliance protocols essential for all involved in private capital investments.

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