Thin Capitalization Rule ▸ Conditions ⚫ The debt-to-equity ratio cannot exceed a limit • Financial institution: 5:1 Other industries: 2:1 ▸ Effects Portion of interest expense above the stipulated ratio will be disallowed ▸ Exceptions If there is sufficient evidence (e.g. a thin capitalization special issue file) to show that the financing arrangement is at arm's length, these interests may still be fully deductible even if the ratios are exceeded. 48
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