Could recent developments have us talking about Tim Hortons, BCE and the Boston Celtics in the same sentence one day?

With the recent news that Burger King will pay $12.5 billion to acquire Tim Hortons, a Canadian institution; one has to wonder if this deal will bring an end to the popular U.S. strategy of tax inversions. It has been used quite frequently in the past by American corporations to reduce their corporate tax burden by relocating to jurisdictions with favourable tax laws.

Firstly, I think it is worth noting that compared to many recent deals, this one makes the most business sense as Burger King is looking for a way to grow their breakfast offerings; especifically coffee, and compete with the likes of McDonald’s and Dunkin Donuts. Both of these companies have recently initiated anti-Starbucks ad campaigns as they begin to realize the importance of the breakfast and coffee business to their bottom line. Those of us in Canada know how synonymous the “Timmy’s” name is with coffee.

That being said, this is primarily a tax-inversion strategy. The acquisition of a stable and growing business is secondary. However, with the substantial media coverage that this deal is generating, I cannot help but wonder if this will be the deal that pushes the U.S. Government to find a way to close this loophole and limit its use by major corporations.

If this were to happen it would be reminiscent of a number of North American corporations attempting to take advantage of a tax structure only to have the government change the rules.

Many of us in Canada will remember the Halloween Massacre of 2006 when Finance Minister Jim Flaherty announced that income trusts would be taxed in a similar manner to corporations at a rate of 30%. The previous structure allowed corporations to flow their distributions to their unit holders on a pretax basis thus dramatically reducing their corporate taxes payable.

The new law saw valuations of many of these companies drop dramatically. The energy sector was perhaps the hardest hit, with estimated losses of $35 billion overnight.  Although the new rules were instituted to reduce a perceived loss of tax revenue, it was done in a rather dramatic fashion when it became apparent that a number of major Canadian corporations were looking to convert to income trusts to further reduce their tax liability. On October 11^th,2006, a mere 20 days before Finance Minister Flaherty announced the changes, BCE Inc., one of Canada’s largest publicly traded companies, announced plans to convert from a corporation to an income trust. The forecasted loss for the government by allowing BCE and fellow telecom giant Telus to convert would have been in the neighborhood of $1.5 billion annually. There is no doubt that the threat of more companies converting forced the government to act swiftly and decisively to limit the potential tax loss.

Master Limited Partnerships (MLPs) in the U.S. have a very similar story. MLPs in the U.S. started in quite the same way with the first MLP in 1981.  The goal was to distribute income in a pretax manner and thus dramatically reduce their tax burden. While a structure like this did, and does, continue to make sense for companies in the business of production, processing, and transportation of oil, natural gas, and coal (energy sector); a number of major corporations started to convert as well. Interestingly, the Boston Celtics, once a publicly traded company, even converted to an MLP during the height of its popularity.

In 1987, amid concerns of substantial losses in tax revenue, the U.S. government passed a law limiting the actions of MLPs. Primarily speaking, MLPs could no longer run an operating business. This effectively stopped the practice of converting to MLPs for tax savings. The U.S.  Internal Revenue Service did grandfather all current MLPs for 10 years and allowed them to manage their conversion back to traditional corporations (much like the Canadian government did for income trusts, but only over a 5 year period). Today the majority of MLPs are in the energy sector and have specific requirements that must be met in order to maintain their tax status.

As implausible as it may seem, there may come a day where we could be talking about Tim Horton’s, BCE, and the Boston Celtics in the same sentence.

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