The Canadian/U.S. cross border market could benefit substantially from the potential dissolution of a current withholding tax, where the Canadian government charges between 10% and 25% on interest and rent paid to non-residents, according to Martin Fingerhut, attorney at Blake, Cassels & Graydon.
This withholding tax currently applies to commonly securitized consumer assets, such as credit cards, auto loans, home-equity loans, personal lines of credit, which do not fit within the long-term debt exemption. Long-term mortgages and franchise loans fall into the commonly used exemption of transactions that do not require repayment of more than 25% of the principal within the first five years.
"While certain demand and short-term corporate obligations can be structured to accommodate the exemption, the process is somewhat complex and may, in some circumstances, prove uneconomic by virtue of attracting a 50-basis-point or larger Canadian capital tax,'" Fingerhut said.
Currently, Canada is considering eliminating or reducing these and other withholding taxes that are detrimental to cross border securitization, among other economic incentives.
According to Fingerhut, Canadian investors are more risk-adverse when it comes to subordinated and lower-rated tranches, whereas the U.S. bid might benefit certain industries exploring alternative means of funding. Fingerhut compares the potential changes to what has happened in other non-U.S. countries that have been welcomed into the U.S. market.
"Similar changes in Australia and Portugal have led to the securitization of billions of dollars of mortgages and other receivables in the U.S. and other foreign capital markets," Fingerhut said.