Thin capitalization refers to the ratio of debt to equity. Where a corporation is heavily capitalized by debt claims, it is considered to be thinly capitalized. In certain circumstances, a corporation that is thinly capitalized by non-residents may not be entitled to a full deduction of its interest expense.
The situation in a corporation in which shareholders have invested a very small amount in return for shares, usually an amount that is inadequate to cover the reasonably foreseeable obligations of the corporation’s business. Even though most Canadian corporate statutes do not require any minimum capitalization, thin capitalization has been argued to be a ground on which the separate legal personality of the corporation should be disregarded.