*This article was first published by Thomson Reuters Journal of International Taxation. By: James A. Guadiana, Partner and Nick Richards, Partner
The international cannabis market is growing rapidly. Currently, the North American market dominates the world scene. Because of the interest in the North American market, we can expect continued interest in the United States which should lead to further inbound investment. Additionally, the growing experience of U.S. cannabis entrepreneurs along with the desire for investment on the part of U.S. cannabis companies has led to expanded activities in other parts of the world. This article will discuss the U.S. federal income tax aspects relating to the cannabis industry’s cross border activities. We will cover both outbound investment with U.S. businesses establishing operations outside the United States, and inbound investment, that is, foreign investors establishing U.S. operations.
General Planning Considerations
Both inbound and outbound tax planning involves similar considerations, including:
Planning a post-acquisition structure which achieves the lowest aggregate tax burdenin both the countries in which a business is operated and withholding, branch and other taxes imposed on the shareholders and other owners of the enterprise upon repatriation of profits. This requires, in some cases, selection of the right jurisdiction for such operations as well as the manner of capitalization, that is, pure equity, or debt and equity ; it also will require attention to the tax rules of the jurisdiction of operations relating to the nexus of related parties to that jurisdiction and the availability of tax treaties which would prevent the imposition of tax on “business profits” unless the foreign party has a “permanent establishment” within such jurisdiction. To the extent a business is conducted in a jurisdiction with related parties in other jurisdictions, attention must be given to transfer pricing rules of both jurisdictions involved in such intercompany transactions; With respect to the jurisdiction in which the investors/owners are located, whether a participation exemption of some sort exists for such persons (generally available only to companies and not individuals); and Tax reporting requirements of both jurisdictions with regard to dividends, and regulatory requirements of the jurisdiction of operations, if any, relating to the business to be conducted within its borders. Section 280E of the Internal Revenue Code
In the case of cannabis operations, both regulatory and special U.S. tax considerations can apply to the extent that (i) operations are conducted within the United States (whether such business entities are owned by U.S. or foreign persons) or (ii) in the case of U.S. persons who will be investing in cannabis operations in a foreign jurisdiction, as well. Most notably, attention must be given to section 280E of the Internal Revenue Code which states as follows:
No deduction or credit shall be allowed for any amount paid or incurred duringthe taxable year
in carrying on any trade or business if such trade or business(or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
While a detailed analysis of the statute is beyond the scope of this article, some discussion is necessary to take into account both inbound and outbound tax planning aspects. The disallowance of deductions under section 280E is limited by the 16t h Amendment to the U.S. Constitution which authorizes the U.S. “Income” tax. The term “income” has been defined as “gain”  and as a result the income tax cannot tax more than a taxpayer’s gain. In order to determine gain, it is clear that gross receipts must be reduced by cost of goods sold. As a result, section 280E operates to disallow deductions but it cannot disallow the costs associated with producing goods – the Cost of Goods Sold or COGS. Congressional intent is to this effect.
Cost of Goods Sold is determined according to inventory methods proscribed by the Commissioner under section 471(a) and Treas. Reg. § 1.471, et seq. The regulations provide inventory accounting rules for resellers (Dispensaries) at section 1.471-9 and for producers under the “full absorption method” at section 1.471-11. Generally, full absorption taxpayers that are subject to section 280E are allowed to include all costs in COGS except for those costs set forth under section 1.471-11(c)(2)(ii).  The courts have consistently held that section 280E disallows all deductions (and credits) for costs that could not be included in COGS under the applicable section 1.471 inventory method.
There have been various taxpayer efforts to establish that certain aspects of a cannabis enterprise are not “trafficking” and are not subject to section 280E. Section 280E does notdefine “trafficking” but in a series of cases the Tax Court has defined trafficking for purposes of section 280E as “the act of engaging in a commercial activity – that is, to buy and sell regularly.” 
The courts have consistently held that marijuana dispensaries operating in compliance with state law are trafficking in controlled substances and are subject to Section 280E. The courts have also held that the paraphernalia and T-shirt component of a dispensary isnot a separate business and it is also subject to section 280E. But, in CHAMP the Court held that the robust caretaking activities of a single business that also dispensed marijuana was not subject to section 280E. On one occasion, the Tax Court held that section 280E applied to an unlicensed management company under common ownership with the cannabis company for which it provided the personnel and other day-to-day business functions necessary to carry on its cannabis trade or business. But, recently the Court held that Section 280E “is narrow in the sense that it applies only to expenses incurred while conducting a trade or business…” This last case is interesting because, while dicta, the Tax Court stated that section 280E did not apply to start-up costs or costs subsequent to the end of the active business.
In reading these cases and their interpretations of “trade or business” and “trafficking” under section 280E, it becomes apparent that circumstances may sometimes exist where various activities being conducted by a cannabis company could be divided into multiple separate self-standing operations rather than be aggregated into one single trade or business. If so, it may be possible to account for and separate the different activities so that they could each be established as separate trades or businesses, some of which would be subject to section 280E, and others of which would not. The Tax Court in
Patients Mutual  Assistance Collective Coop. v. Commissioner made some helpful comments in this regard as follows:
An activity is a trade or business if the taxpayer does it continuously and regularly with the intent of making a profit. See, e.g.,
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987 ); United States v. Am. Bar Endowment, 477 U.S. 105, 110 n.1 (1986). A single taxpayer can have more than one trade or business, CHAMP, 128 T.C. at 183, or multiple activities that nevertheless are only a single trade or business, see, e.g., Davis v. Commissioner, 29 T.C. 878, 891 (1958). Even separate entities’ activities can be a single trade or business if they’re part of a “unified business enterprise” with a single profit motive. Morton v. United States, 98 Fed. Cl. 596, 600 (2011). Whether two activities are two trades or businesses or only one is a question of fact. See, e.g., CHAMP, 128 T.C. at 183; Owens v. Commissioner, T.C. Memo. 2017-157, at 21. To answer it, we primarily consider the “degree of organizational and economic interrelationship of various undertakings, the business purpose which is (or might be) served by carrying on the various undertakings separately or together, and the similarity of the various undertakings.” Olive, 139 T.C. at 41; sec. 1.183-1(d), Income Tax Regs.
Special attention must also be given to the facts and holding of
Alternative Health Care. In Alternative, the taxpayer established a licensed cannabis company (CA non-profit) along with a commonly owned management company that operated the licensed business, employed the workers, and paid all of the bills. The business owners took the position that neither company was subject to Section 280E because the businesses did not “consist of” trafficking in controlled substances. In a disastrous holding for the taxpayer and industry, the Tax Court found that the management company and licensed company were each trafficking and that the management company did not need to be the licensed party in order to be subject to Section 280E. Thus, under Alternative, there is risk that the use of separate entities in the cannabis space can increase (double in Alternative) the effect of 280E. And while the scope of Alternative is yet to be seen, based on the facts in the opinion we suggest special care be taken to ensure: 80E is properly reported in the entity that is intended to be trafficking, the licensed entity employ the plant touching employees, the licensed entity maintain ultimate control of its day-to-day operations, and Special care be taken when there is common ownership or control.
Substantial additional guidance can also be found in precedence under section 446(d). Section 446(d) states: “Taxpayer Engaged In More Than One Business — A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business.” Factors that courts have looked at for this purpose include (1) whether the two businesses are operated as separate divisions, with separate books of account, employees, management, and other incidents of business; (2) the self-sufficiency of each business; (3) whether the right for the separate division to exist is granted by federal law and regulations; (4) whether assets, books, records, and activities of the two divisions must be segregated under federal law; (5) whether the two divisions have different office space or are located at physically separate locations; (6) whether the clientele of the two divisions are the same or are mutually exclusive; (7) whether one business is a branch of the other business; (8) whether each business has the requisite assets and employees for the production of income; and (9) whether items in common between the two divisions could be shared by any two dissimilar businesses owned by the same taxpayer (see,
e.g., Gold-Pak Meat Co., Inc., T.C. Memo. 1971-83; Peterson Produce Co. v. United States, 313 F.2d 609 (8th Cir. 1963); Nielsen, 61 T.C. 311 (1973); and Rev. Rul. 74-270). 
Based on this discussion of these legal authorities, it may be possible for investors to find and perhaps establish separate “trades or businesses” either within the same entity or in different entities within the same control group so that the taint of section 280E would impact only some but not all of the “trades or businesses.” This analysis could also be relevant if a holding company structure is contemplated so as to insulate the holding company parent from being engaged in the same trade or business as its subsidiaries. To accomplish this, the following safeguards could be adopted when planning for the inbound and outbound acquisition or establishment of new businesses which include cannabis operations:
Consideration of a holding company structure makes sense since, even if some of its income is derived by a subsidiary which is a grower or seller of cannabis, the activities of the holding company can be established to be a separate “trade or business” from the subsidiary. The focus here should be on the financing and stewardship activities of the parent. Obviously, this is more likely to be successful if at least one of the subsidiaries of such holding company is engaged in a business that is not a direct cannabis activity. An obvious example would be where the holding company has a subsidiary which is a grower and seller of cannabis, and another subsidiary is engaged in the ownership and operation of real estate. Separate books and records should be maintained for each separate “trade or business.” Transfer pricing rules should be followed even if this exercise is not needed to prevent allocations of income by the IRS, for example where a consolidated return is being filed. Again, the purpose is to support the separateness of the various entities. Where possible, the subsidiaries referred to in the preceding paragraph should be organized as corporations and not disregarded entities. While it is possible for divisions within one company to constitute a separate trade or business, separate corporate entities only make the argument for separateness stronger. In this regard,there is some basis in corporate law that shareholders of a corporation are more limited in the control of the day-to-day activities of the subsidiary than in the case of an LLP, LLC or LP.  Planning For Outbound Operations
Frequently, U.S. cannabis operators use their expertise and funds to establish cannabis operations in foreign countries. This is typically done by having the U.S. group form a foreign corporation in the jurisdiction in which it intends to conduct business. This generally results in the foreign corporation being what is referred to as a “controlled foreign corporation” or a “CFC”. Generally speaking, a CFC is a foreign corporation more than 50% of the stock of which, measured by vote or value, is owned by U.S. persons who  own at least 10% of such stock. A central question here is, if a foreign subsidiary is
involved in the production and distribution of cannabis products totally outside the United States, does section 280E apply?
Consider that such operations are not directly subject to U.S. tax. Instead, only the U.S. shareholders are impacted by the provisions that relate to CFCs. Moreover, as a result of the enactment of what is commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Act”), the treatment of income derived by foreign affiliates of U.S. companies have been dramatically revised as follows.
Territorial Tax Regime Introduced
The Act changed the basis of taxation of income of U.S. corporations to a “territorial” or “participation exemption” system (many nations, including Canada have a similar system). Under the Act, the “foreign source portion” of dividends paid by foreign corporations to a U.S. corporate shareholder that owns 10% or more of the foreign corporation will effectively be tax exempt because of the deduction for dividends received, or “DRD”. The foreign-source portion of a dividend from a specified 10%-owned foreign corporation is that amount which bears the same ratio to the dividend as the undistributed foreign earnings of the specified 10%-owned foreign corporation bears to the total undistributed earnings of such foreign corporation. Consistent with this, the shareholder will no longer be allowed a foreign tax credit or deduction for any taxes or expenses attributable to the deducted dividend.
Global Intangible Low-Taxed Income
As noted above under “Territorial Tax System,” the Act generally exempts from U.S. tax foreign income earned by a U.S. corporation through a foreign subsidiary by way of the DRD. In order to reduce instances where U.S. taxpayers seek to shift profits from intangibles to offshore jurisdictions and thereby benefit further from this new participation exemption, the Act imposes a tax on foreign-source intangible income. Therefore, for taxable years of foreign corporations beginning after 2017, and for taxable years of U.S. shareholders in which or with which such years of foreign corporations end, a U.S. shareholder of any CFC must include in gross income its global intangible low-taxed income (“GILTI”) in a manner generally similar to inclusions of subpart F income. Under the Act, U.S. shareholders must include in income currently their shares of each of their CFC’s profits to the extent they exceed 10% of the CFC’s return on its tangible assets. In general, GILTI includes all net operating income of a foreign corporation not otherwise taxed to U.S. shareholders (excluding generally other income currently taxed to the shareholder (such as Subpart F income and effectively connected income) in excess of 10 percent of the aggregate of its adjusted bases in specified tangible property used in its trade or business for which a deduction is allowable under section 168. For tax years that begin after 2017 and before 2026, 50% of any GILTI amount which is included in the gross income of the domestic corporation (but not a RIC or REIT) for the tax year is deductible under section 250. However, in the case of a private equity fund organized as a partnership, such deduction will generally not be allowed if the partnership’s income flows through to a shareholder that is not a C corporation (but see the possible election of section 962 ). For years that begin after 2025, the deduction will be reduced to 37.5% of the GILTI amount included in the gross income of the domestic corporation for the tax year. Another advantage for a C corporation is that such taxpayers are allowed a deemed paid foreign tax credit for 80% of the foreign taxes attributable to the GILTI inclusion. Thus, U.S. shareholders must report the annual inclusion of “GILTI”. Because the annual GILTI inclusion starts out with “tested income” which allows for the offset of “the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954 (b)(5)  (or to which such deductions would be allocable if there were such gross income),”  the question arises as to whether section 280E plays a role in the determination of allowable deductions and credits in this context. Specifically, does the assertion of the application of section 280E by the Internal Revenue Service (“IRS”), which seems to have the effect of giving “extraterritorial effect” to such statute, contravene any laws? I don’t think the answer to that question is clear, but our expectation is that the IRS is likely to assert that section 280E does apply. Among other arguments, the IRS can point to when Congress enacted the “Controlled Substance Act of 1970 (“CSA”), section 801 thereof noted in the “Congressional findings and declarations” the need for such legislation and that “A major portion of the traffic in controlled substances flows through interstate and foreign commerce.” 
Needless to say, with the application of section 280E, the amount of GILTI recognized bya U.S. shareholder would be greater than it would be had section 280E not applied to reduce otherwise allowable deductions under section 951A(c)(2)(A)(ii). While GILTI applies to noncorporate U.S. shareholders without the benefit of any deductions or credits,  the Code permits a U.S. shareholder that is a C Corporation to claim a 50% deduction as well as a credit for 80% of foreign taxes imposed on the foreign affiliate. However, because of the possible application of section 280E in this context, the possibility exists that the IRS would not only increase the amount of GILTI derived by the U.S. shareholder/C Corp, but it would also seek to disallow the 50% (37.5% in later years)deduction allowed by section 250 and, perhaps, also disallow foreign tax credits otherwise allowable. At least with respect to the 50% deduction, this would not seem to satisfy the requirement that the disallowed deduction or credit be of an “amount paid or incurred during the taxable year in carrying on any trade or business….” As for the foreign tax credit, the foreign tax at first glance might seem arguably to be an amount paid or incurredin carrying on a trade or business and therefore subject to a possible disallowance undersection 280E. However, in light of the history of disallowances under section 280E, the assertion by the IRS of such a disallowance would likely be viewed by a court as an overreach given the policy behind section 280E.
Another possible application of section 280E in an outbound context could be with respect to dividends received by U.S. shareholders who are not C corporations. Specifically, the amount of dividends deemed received could be increased if the IRS re-computes the foreign affiliate’s earnings and profits by disallowing deductions pursuant to section 280E.  This should also be the case where such shareholder makes a disposition undersection 1248.  Apart from this increase in amount, the dividend should still constitute a “qualified dividend” so long as the foreign affiliate is a “qualified foreign corporation”. 
Inbound Tax Planning
There are various ways in which a foreign investor can either establish cannabis operations within the United States or invest in an existing cannabis company. These include the following:
(1) Acquisition by a foreign corporation of all of the shares of a U.S. corporation conducting a cannabis business;
(2) Acquisition by a foreign corporation of all of the assets of an established U.S. cannabis business and holds it as a branch;
(3) Acquisition by a group of foreign investors in the shares or assets of a U.S. corporation engaged in a U.S. cannabis business.
Possibility of Inversion
We have seen a number of acquisitions where an existing Canadian corporation in a cannabis business acquires ownership of shares or assets of U.S. cannabis businesses. In some cases, this has resulted in the acquiring Canadian company becoming a domestic corporation for U.S. federal income tax purposes under section 7874, the so-called “anti-inversion” statute. Generally speaking, so long as the acquisition company or its affiliates have substantial business activities in Canada after the acquisition, the Canadian corporation will not be impacted by section 7874. However, if the foreign corporation is not engaged in substantial business activities in Canada, then so long as certain conditions are met, the foreign corporation will be treated as a “foreign surrogate corporation” with the result that it is a U.S. corporation for U.S. federal income tax purposes.
A number of Canadian corporations were established under Canadian law even though their intention was to engage exclusively in U.S. business activity. The only reason they were organized in Canada is because such companies were funded from Canadian sources, but their entire business operations were conducted within the United States. For all intents and purposes, these entities are treated as U.S. corporations by the Internal Revenue Code. Yet, they are also treated as residents of Canada for corporate law purposes and Canadian tax, as well. While section 7874 was intended to prevent U.S. corporations from expatriating to a foreign jurisdiction, there are a number of situations where this statute has been intentionally violated so that a foreign corporation could have benefits only offered to domestic corporations while raising their funds from sources in the foreign jurisdiction. For example, a Canadian entity could raise funds pursuant to an IPO in Canada, for the sole purpose of investing in U.S. real estate. 
The completion of such an offering and acquisition of U.S. rental real estate on the Canadian market has resulted in a number of Canadian corporations which have been inverted into U.S. corporations with the result that they could elect to be treated as real estate investment trusts (“REIT”) under the Internal Revenue Code.  With such status, and so long as the entity satisfies certain investment and distribution requirements, this entity will not be subject to U.S. federal income tax on its net rental income.
In other instances, Canadian corporations have been formed which acquired U.S. cannabis businesses within the United States in a similar fashion with the result that they also became U.S. corporations for tax purposes.  Sometimes, these corporations wish to make further acquisitions of other Canadian corporations which essentially have their operations in the United States as well. In these instances and in order to permit the post-acquisition group to file consolidated returns, the Canadian parent of the U.S. target group undergoes a type “F” reorganization to become a domestic corporation. To accomplish this, the Canadian parent must meet the requirements for an F reorganization set forth in the Regulations. 
Foreign Ownership Respected
Assuming the Canadian owner is respected as such and not “inverted” under section 7874,we now examine the various ownership structures, such as a U.S. subsidiary conducting a cannabis business, wholly-owned by a Canadian corporation. This is probably the simplest and safest ownership structure for the following reasons:
(1) Under current law, U.S. federal income tax rate on corporate income is 21%. While the current administration has proposed to increase this rate to 28%, the decrease in rates in other countries in recent years would make raising this rate difficult.
(2) Dividends paid by the U.S. subsidiary to its Canadian parent would be subject to a U.S. 5% withholding tax.
(3) A sale of shares of the U.S. subsidiary by the foreign parent would likely not be subject to U.S. federal income tax unless the U.S. subsidiary is a U.S. Real Property Holding Company under FIRPTA.
(4) The separation of the subsidiaries business from that of foreign parent, with each having their own respective books and records, should go a long way toward limiting the application of section 280E. Specifically, if it is possible to bifurcate U.S. operations into two or more separate “trades or businesses,” this may also reduce the impact of that statute. See for example [CHAMP…..]
It would also be possible for foreign investors to form a partnership or syndicate to acquire the shares of a U.S. corporation conducting the cannabis business. This would not be recommended if the business being acquired was not in corporate form since the foreign investors would end up being treated as being engaged in a U.S. trade or business. Alternatively, the investors could form a Delaware “blocker”. In this case, the investors would generally be subject to a U.S. withholding tax of 30% (if they are not residents of a treaty country) or generally 15% (if you residents of treaty countries) 
Special purpose acquisition companies (“SPACs”)
SPACs are publicly traded corporations the shares of which are offered before any specific targets are identified. They frequently issue warrants as well as shares. They are often referred to as “blank check companies.” Essentially, they are formed as a shell listed on a stock exchange with the purpose of acquiring privately held companies. As described by the SEC, “A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified”.  SPACs raised a record $82 billion in 2020, a period sometimes referred to as the “blank check boom”. 
A recent Bloomberg publication noted that “seven Canadian special purpose acquisition companies are ready to deploy $1.9 billion in pursuit of U.S. cannabis companies and other entities, according to data from Viridian Capital Advisers.” It went on to note that“[o]ne of those SPACs, Choice Consolidation Corp., raised over $175 million Feb. 19through an initial public offering on Canada’s New Stock Exchange, nearly doubling its initial target of $100 million.” 
Reading this quote, two specific U.S. federal income tax issues come to mind. These are:(1) For U.S. investors in a Canadian SPAC, the possibility that the Canadian publicly traded company could become a passive foreign investment company (“PFIC”) must be addressed. Failure to plan and possibly make certain elections on the investors tax returns could have disastrous tax consequences; (2) A second tax issue is that the Canadian SPAC’s only investment may end up being a U.S. business. If this occurs it’s likely that the Canadian Corporation will be treated as a U.S. corporation for U.S. federal income tax purposes.
Passive Foreign Investment Companies (“PFICs”)
If a U.S. person were to become a shareholder of a PFIC, the adverse tax consequences that result could be extremely costly. In fact, there are probably no other instances provided in U.S. federal income tax law that can be nearly as costly as an unintended PFIC. If a U.S. shareholder were to acquire an interest in a foreign corporation during a year in which such foreign corporation meets the definition of a PFIC, and barring a timely election for “qualified electing fund” (“QEF”) treatment, or, alternatively, qualification and election for “mark to market” treatment, the tax consequences of a distribution on, or disposition of, the shares of such corporation would be determined under section 1291. Under section 1291: (1) all income derived from the ownership and disposition of the PFIC will be ordinary income (no portion is capital gain); (2) all income will be effectively allocated over the period of years of ownership of the PFIC shares with a portion of such reallocated income as being subject to the highest tax rates in effect for each of such years; and (3) interest (determined with reference to the “underpayment rate”) will be changed on such reallocated income based on the deferral of the income from the years in which it was likely earned but not distributed.
A PFIC is defined in section 1297(a) as a foreign corporation meeting either of the following conditions:
((1)) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or
((2)) the average percentage of assets held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.
Thus, because a SPAC – as a “blank check” company – will be holding large amounts of cash and liquid investments until it locates a target acquisition, there is a risk that a U.S. shareholder could end up being a PFIC shareholder. There is an exception that may apply to avoid PFIC status. Section 1298(b)(2) provides as follows: A corporation shall not be treated as a passive foreign investment company for the first taxable year such corporation has gross income (hereinafter in this paragraph referred to as the “start-up year”) if: (A) no predecessor of such corporation was a passive foreign investment company; (B) it is established to the satisfaction of the Secretary that such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following the start-up year; and (C) such corporation is not a passive foreign investment company for either of the 1st 2 taxable years following the start-up year.
Let’s consider the possible application of this exception. In mid-2018, a SPAC is newly formed. One of its investors, A, is a U.S. individual. The SPAC adopts the calendar year as its fiscal year. Assume the entire proceeds of the offering are placed in a non-interest- bearing account until January 1, 2019. Thereafter, the funds earn interest. During the course of 2019, the SPAC investigates opportunities and finally makes an acquisition of a target in early 2020. In this example, A will not be treated as a shareholder of a PFIC for two reasons. First, 2019 and not 2018 will be the start-up year since the SPAC did not have any gross income until 2019. Second, with the acquisition of a target in early 2020,the SPAC no longer meets the definition of PFIC in 2020 and 2021.
Let’s modify this example. During December 2018, the SPAC inadvertently earned $100 of interest income. In this case, the start-up year will be 2018 with the result that the SPAC would meet the definition of PFIC during 2018. In this case, A should investigate the possibility of making a QEF or mark to market election.
SPAC becomes a “Surrogate Foreign Corporation ”Resulting in its Inversion under Section 7874
After having invested in a SPAC which is a listed Canadian corporation, foreign investors may find that they have actually invested in a U.S. domestic corporation instead. The following adverse tax consequences are possible:
(1) Third country investors entitled to benefits of a treaty that such third country has with Canada (but not with the United States), could find that dividends are now subject to U.S. withholding taxes at 30%.
(2) Another example would be a foreign shareholder resident in Barbados, a country which has a tax treaty with Canada and the United States, may find that dividends paid by the SPAC will be subject to a 15% U.S. withholding tax, as well as a 15% Canadian withholding tax.
(3) U.S. shareholders may find that they are subject to a 15% withholding tax in Canada and also a regular U.S. dividend tax without a credit for the Canadian withholding tax because, for U.S. tax purposes, the income is from U.S. and not foreign sources.
These consequences may not be significant if investors in such SPACs are not receiving significant (if any) dividend income from the SPAC and are focused primarily on selling the shares for capital gains which are generally not subject to Canadian and U.S. federal income taxes.
 In the past, inbound investors would seek to capitalize their local affiliates with interest-bearing debt as well as equity. The purpose for this was to reduce the taxable income of the local affiliate to the fullest extent possible without violating any “thin capitalization” rules imposed under the laws of the local jurisdiction. The Office of Economic Cooperation and Development (“OECD”) in its “Base Erosion Profit Shifting” (“BEPS”) initiative, Action 4 (“Limitations on Interest Payments”) provides for a limitation on the deductibility of net interest expense to 30% of EBITDA (and at the option of the nation adopting such rule an even lower percentage). This limitation was adopted by the United States with some modifications as part of the 2017 tax legislation, and by Canada in 2021.
 See the OECD Model Tax Convention on Income and on Capital: Condensed Version 2017 (Articles 5 and 7). “
The OECD Model Tax Convention, a model for countries concluding bilateral tax conventions, plays a crucial role in removing tax related barriers to cross border trade and investment. It is the basis for negotiation and application of bilateral tax treaties between countries, designed to assist business while helping to prevent tax evasion and avoidance. The OECD Model also provides a means for settling on a uniform basis the most common problems that arise in the field of international double taxation.” ( https://www.oecd.org/ctp/treaties/model-tax-convention-on-income-and-on-capital-condensed-version-20745419.htm)
 See, for example, the bulletin of the OECD entitled “Budding industry: How companies and regulators are meeting the rising demand for new cannabis varieties”(28 October, 2020).
 IRC § 280E (emphasis added).
 “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and with regard to any census or enumerations” U.S. Const. amend. XVI.
 “Whatever difficulty there may be about a precise and scientific definition of “income,” it imports, as used here, something entirely distinct from principal or capital either as a subject of taxation or as a measure of the tax; conveying rather the idea of gain or increase arising from corporate activities.”
Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 (1918). “Income may be defined as the gain derived from capital, from labor, or from both combined.” Stratton’s Independence v. Howbert, 231U.S. 399, 415 (1913). “It will be well to note at the start that our scheme of income taxation provides for a method of computation whereby all receipts during the taxable period which are defined as gross income are gathered together and from the total are taken certain necessary items like cost of property sold; ordinary and necessary expenses incurred in getting the so-called gross income; depreciation, depletion, and the like in order to reduce the amount computed as gross income to what is in fact income under the rule of Eisner v. Macomber, and so lawfully taxable as such. In this way true income is ascertained by taking from gross income as defined that which is necessary as a matter of actual fact in order to determine what as a matter of law maybe taxed as income. While such subtractions are called deductions, as indeed they are, they are not to be confused with deduction of another sort like personal exemptions; deductions for taxes paid; losses sustained in unrelated transactions and other like privileges which Congress has seen fit to accord to income taxpayers under classifications it has established. While the first kind of deductions are inherently necessary as a matter of computation to arrive at income, the second may be allowed or not in the sound discretion of Congress…..Such deductions as distinguished from the first kind and are allowed by Congress wholly as a matter of grace. Davis v. U.S.,87 F.2d 323, 324-35 (2d Cir. 1937)
 The Senate Report, under Explanation of Provisions, states: “All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipt with respect to effective cost of goods sold is not affected by this provision of the bill.” S. Rep. No. 97-494 (Vol. I), at 309 (1982).
See also, Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 173,178 (2007) (government concession that section 280Edoes not prohibit a taxpayer from claiming COGS).
 CC Memo 201504011, POSTS-125750-13 (12/10/2014) “For example, in the case of a producer of property, inventory–costing rules typically require capitalization of costs that are “incident to and necessary for production or manufacturing operations or processes.” “…a marijuana producer using an inventory method would have capitalized direct material costs (marijuana seeds or plants), direct labor costs (e.g. planning; cultivating; harvesting; sorting), Category 1 indirect costs (§1.471-11(c)(2)(i), and possible Category 3 indirect costs”
Id. at 6
 (a) Marketing expenses, (b) Advertising expenses, (c) Selling expenses, (d) Other distribution expenses, (e) Interest, (f) Research and Experimental Expenses, (g) Section 165 losses, (h) Percentage depletion in excess of cost depletion, (i) Depreciation and amortization in excess to that reported under GAAP, (j) Income taxes attributable to income received on the sale of inventory, (k) Pension contributions for past services,(l) General and administrative expenses incident to and necessary for the taxpayer’s activities as a whole rather than to production or manufacturing, (m) Salaries paid to officers attributable to the performance of services which are incident to and necessary for the taxpayer’s activities as a whole rather than to production or manufacturing operations or processes.
Californians Helping to Alleviate Medical Problems, Inc. (CHAMP), 128 T.C. 173, 182 (2007).
Patients Mutual Assistance Collective Coop. v. Commissioner, 151 T.C. 570 (Nov. 29, 2018), aff’d Ninth Circuit, April 22,2021 (No. 19-73078); Olive v. Commissioner, 139 T.C. 19, 38 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015); Canna C No. 19-73078 are, Inc. C. Commissioner, T.C. Memo. 2015-206.
Alternative Health Care Advocates v. Commissioner, 151 T.C. 225 (2018)
San Jose Wellness v. Commissioner, 156 T.C. No. 4 at 24 (Feb. 17, 2021)
 See footnote 11.
 See also the discussion set forth in Parra and Harnish, “Exploring the Undefined: Trade or Business”, The Tax Adviser, April 1, 2019.
 See Acevedo, “’Trade or Business’: The Relevance of a Deceptively Simple Income Tax Phrase to the Labor Code, Federal Statutes, and Private Equity Activity”, Fall 2015, page 160, at page 176, which states: One key distinction between investors in a corporation and investors in a limited partnership, LLP, or LLC, is the fact that the organic law of a corporation prohibits shareholders from actively engaging in the management, oversight, and operations of the corporation. Historically, investors were not involved in the managerial or operational activities of the invested companies. Corporate investors remain structurally prohibited from engaging in the management or operations of the corporation. [The Model Business Corporation Act(“MBCA”)] Section 8.01(b) provides, “All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors.” Rejecting a shareholder’s desire to participate in a liquidation proceeding, one court noted, “When a statute provides that powers granted to a corporation shall be exercised by any set of officers or any particular agents, such powers can be exercised only by such officers or agents.” With the notable exceptions of Clark v. Dodge, and Galler v. Galler, corporate shareholders, both public and closely-held, remain prohibited from managing or overseeing the corporation. In contrast, the organic laws of LLPs, LLCs, and now LPs, allow for active participation by investors. The change in the structural rules reflects the policy change by state legislatures regarding the level of participation and control investors may exert in the entity. While state laws allow investors the flexibility of maintaining a separate legal fiction among the entities, state laws should not promote the idea that separation in form promotes separation in substance, especially when doing so would frustrate public policy.
 See IRC § 957.
 While not initially permitted following the enactment of section 951A, Prop. Treas. Reg. § 1.250-1, 84 FR 8188, 8189 (Mar. 6, 2019) modified this treatment to allow individual taxpayers to claim the 50% (37.5%) deduction and foreign tax credits generally only allowed to corporations under section 250, so long as the individual makes an election under section 962. The impact of the election does however treat the individual as having recognized a distribution from the CFC, which would be taxable under current rates, unlike the case with a C Corporation shareholder which would not recognize such income.
 These include deductions normally allowed in computing U.S. source taxable income.
 IRC § 951A(c)(2)(A)(ii).
 See § 801. Congressional findings and declarations: controlled substances.
 However, as noted at footnote 2,
supra, these shareholders may claim the benefits of section 962 but without the benefit of deferring income until a “distribution” as would be the case with a C corporation shareholder.
 Treas. Reg. § 1.312-6(a) provides as follows: In determining the amount of earnings and profits …due consideration must be given to the facts, and, while mere bookkeeping entries increasing or decreasing surplus will not be conclusive, the amount of the earnings and profits in any case will be dependent upon the method of accounting properly employed in computing taxable income (or net income, as the case may be). For instance, a corporation keeping its books and filing its income tax returns under subchapter E, chapter 1 of the Code, on the cash receipts and disbursements basis may not use the accrual basis in determining earnings and profits; a corporation computing income on the installment basis as provided in section 453 shall, with respect to the installment transactions, compute earnings and profits on such basis. One commentator inciting this regulation states “because the adjustments to E&P found in the Code, regulations, and other authorities assume adjustments are made to taxable income to account for various transactions, taxable income is the most logical starting point. (Friedel, Galanis, and Allen, TMM Portfolio762-4th: Earnings and Profits, Part I: Rules Applicable to Separate Returns, II. General Principles , Introductory Materials, A. Calculating E&P
 IRC § 1248(a) states: (1) a United States person sells or exchanges stock in a foreign corporation, and (2) such person owns, within the meaning of section 958(a),or is considered as owning by applying the rules of ownership of section 958(b), 10percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation (as defined in section 957),then the gain recognized on the sale or exchange of such stock shall be included in the gross income of such person as a dividend, to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock sold or exchanged was held by such person while such foreign corporation was a controlled foreign corporation.
 IRC § 1(h)(11).
 IRC § 7874(B).
 Subversive Real Estate Acquisition REIT LP (October 19, 2020), the purpose of which is to invest in cannabis related real estate.
 IRC § 856,
 See, for example, Ayr Wellness Inc. website (
 Treas. Reg. § 1.368-2(m).
 Section 897
 However, if the shareholder company is resident in a treaty country and owns at least 10% of the voting power of the U.S. corporation, the rate will generally be dropped to 5% under the applicable treaty.
 “Blank Check Company,” SEC.gov. U.S. Securities and Exchange Commission. Retrieved 26 August 2020.
 Ramkumar, Amrith; Farrell, Maureen (January 23, 2021). “When SPACs Attack! A New Force Is Invading Wall Street”. The Wall Street Journal. Retrieved 22 February 2021.
See https://news.bloomberglaw.com/daily-tax-report-international/cannabis- spacs-cross-border-push-threatens-tax-hit-on-investors and https://news.bloomberglaw.com/daily-tax-report-international/tax-traps-await-early-spac-investors-without-ideal-timing-luck