Canada: Budget 2012: New "Foreign Affiliate Dumping" Measures Introduced

Fresh on the heels of a number of recent court decisions,1 and based on recommendations made by the Advisory Panel on Canada's System of International Taxation,2 Budget 2012 proposes an assortment of anti-surplus stripping measures aimed at discouraging certain foreign affiliate investments (referred to as "foreign affiliate dumping transactions" or "FADTs") by Canadian corporations controlled by non-residents, which the Government asserts inappropriately erode Canada's corporate tax base. However, as discussed in further detail below, the proposed amendments contain a "business purpose" exception designed to keep "legitimate" transactions outside of their purview.

By way of background, the Income Tax Act (Canada) (the "Tax Act") generally affords a deduction with respect to interest expenses incurred by a Canadian taxpayer for purposes of making an equity investment in a "foreign affiliate" (which generally includes any foreign corporation in which the Canadian taxpayer (and entities related to the Canadian taxpayer) have an equity interest of at least 10%),3 despite the fact that income of the affiliate may, in many cases, be repatriated from the foreign affiliate as "exempt surplus", free of Canadian income tax. In addition, while the Tax Act has, for some time, contained a specific anti-avoidance provision4 designed to prevent surplus extractions arising from the transfer or other contribution to a Canadian corporate taxpayer by a non-resident shareholder of shares of a "connected" Canadian corporation,5 no similar rule exists where the transferred or contributed property is foreign corporation stock. The proposed FADT measures are intended to discourage foreign-owned corporate groups from undertaking these and other similar transactions in circumstances where the primary motivating factor is a Canadian "tax benefit"6 (including those benefits described above) and the net economic benefits to Canada are modest.

The centerpiece of the proposed FADT measures is new section 212.3 of the Tax Act which, where applicable, will operate to deem a dividend to have been paid by a Canadian taxpayer (referred to as the "corporation resident in Canada" or "CRIC") to its foreign parent to the extent of any non-share consideration given (or obligations assumed) by the CRIC in relation to a FADT (which is defined to include share investments and certain indebtedness,7 along with capital contributions, in any foreign entity that is (or becomes as a result of the FADT or the series of the transactions that includes the FADT), a "foreign affiliate" of the CRIC). Any such deemed dividend will be subject to non-resident withholding tax levied under Part XIII of the Tax Act at a rate of 25%, unless reduced by virtue of an applicable tax treaty.8

New proposed section 212.3 of the Tax Act will also apply in conjunction with certain other amendments to the Tax Act, including amendments to the thin capitalization rules in subsection
18(4) (which generally operate to limit the amount of interest expense that a Canadian corporation may claim with respect to indebtedness owing to "specified non-residents") and the "paid-up capital" and contributed surplus computational rules in section 84, such that any paid-up capital or contributed surplus increases that would otherwise have arisen from an impugned FADT are effectively disregarded.

Finally, Budget 2012 indicates that a variety of changes to various supporting provisions of the Tax Act will be made to ensure a comprehensive application of the new section 212.3 principles.9

As indicated above, the new FADT measures are not intended to apply to foreign affiliate investments that may reasonably be viewed as having been undertaken by the relevant CRIC, instead of being undertaken (or retained) by the non-resident parent or another non-resident entity in the corporate group, primarily for bona fide purposes other than to obtain a tax benefit. To that end, the new measures contain a list of factors that will be given "primary" consideration for purposes of making this determination. These factors include, among others: (a) the degree of present and (expected) ongoing connection between the foreign affiliate's business activities and those of the CRIC (or other members of the CRIC's Canadian group, if any), as compared with those of any non-resident corporation in the corporate group; (b) the degree to which the CRIC was instrumental in the decision to make the investment, and the decision-making authority that the CRIC's senior officers, residing and working principally in Canada, possessed and exercised in connection with the investment decision (again, as compared to their counterparts at any non-resident corporation in the group); (c) any restricted participation entitlement that may exist in respect of the CRIC's share investment in the subject foreign affiliate, insofar as earnings and growth entitlements are concerned (e.g., a preferred share investment as opposed to a common share investment); and (d) the extent to which senior officers of the foreign affiliate are "functionally accountable" to senior officers of the CRIC who reside and work principally in Canada. The Government acknowledges that the formulation of the applicable "business purpose" test is not straightforward. As a consequence, the Government has invited stakeholders to submit comments on the operative considerations identified in Budget 2012 before June 1, 2012.

In the absence of the above-noted business purpose exception, the new rules will apply to any FADT that occurs on or after March 29, 2012. Limited grandfathering may be available in relation to certain FADTs entered into between arm's length parties before that date, provided that, among other things, the parties were obligated to complete the subject transaction pursuant to the terms of a written agreement that was entered into before March 29, 2012 and the transaction occurs prior to 2013.


1 See, for example, The Queen v. Collins & Aikman Products Co. et al., 2010 FCA 251 and Copthorne Holdings Ltd. v. The Queen, 2011 CSC 63.

2 The Advisory Panel on Canada's System of International Taxation (2008) identified certain types of foreign affiliate "dumping" transactions as being abusive (in particular, transactions that reduce the Canadian tax base without providing any meaningful economic benefit to Canadians).

3 See the definition of a "foreign affiliate" in subsection 95(1) of the Tax Act.

4 Section 212.1 of the Tax Act.

5 Paid-up capital may generally be returned to a non-resident shareholder free of withholding tax under Part XIII of the Tax Act.

6 As defined in subsection 245(1) of the Tax Act.

7 Excluding, for instance, certain amounts owing by the foreign affiliate to the CRIC that arose in the ordinary course of the CRIC's business and that are repaid within a commercially reasonable period.

8 For example, under the Canada-United States Income Tax Convention (1980), as amended, the withholding tax rate on qualifying dividends may be as low as 5%.

9 Including, for example, changes to section 128.1 of the Tax Act in the context of certain corporate immigration transactions.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2012 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Todd A. Miller
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions