On October 15, 2012, the Canadian Minister of Finance tabled in
the House of Commons a Notice of Ways and Means Motion to implement
proposed tax changes first announced in the March 29, 2012 federal
budget and included in draft legislation released on August 14,
The proposed tax changes include the so-called "foreign
affiliate dumping rules", which the Government describes as
"restricting the ability of foreign-based multinational
corporations to transfer or 'dump' foreign affiliates into
their Canadian subsidiaries, while preserving the ability of these
subsidiaries to undertake legitimate expansions of their Canadian
businesses." In the budget papers, these proposals were
described as "important to ensure that cross-border investment
is not used to erode the corporate tax base...without providing any
significant economic benefit to Canadians." While those
general policy objectives are legitimate, the legislation itself
goes well beyond those objectives and will likely deter legitimate
foreign investment into Canada.
As drafted, the foreign affiliate dumping rules will apply to
many investments that do not erode the Canadian tax base and will
significantly impede, if not preclude entirely, the ability of many
foreign-controlled Canadian corporations, including public
corporations, to expand their businesses abroad. The legislation
presumes that any investment by a Canadian corporation in a
non-Canadian subsidiary involves one of the targeted tax-motivated
transactions where the Canadian corporation is controlled by a
foreign company. Consequently, it ignores the fact that it is quite
common for foreign investors to invest in international operations
through Canadian companies for non-tax reasons. This is
particularly true in the mining sector where, because of the strong
worldwide reputation of Canadian mining companies, Canadian mining
expertise and Canadian capital markets, Canadian corporations are
often formed to acquire or hold foreign mining ventures in order to
gain access to such expertise and capital.
Numerous organizations made submissions to the Department of
Finance pointing out the overly broad scope of the rules as well as
numerous instances where certain relieving provisions are
technically inapplicable resulting in traps for the unwary. While a
few of the concerns raised with respect to earlier versions of the
draft legislation have been addressed in the legislation tabled
yesterday, the rules remain rife with anomalies, traps and errors.
Unfortunately, and notwithstanding the serious concerns raised by
many organizations, the Government appears determined to enact the
rules as currently drafted.
The legislation tabled in the House of Commons yesterday also
includes, among other things, amendments affecting certain
transactions involving partnerships and tightening up the Canadian
thin capitalization rules affecting the ability of Canadian
corporations to deduct interest on debt owed to certain
The foreign affiliate dumping rules and other important recent
Canadian tax developments will be considered in more detail in a
forthcoming Davies Perspective.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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