On August 16, 2013, the Department of Finance released proposed amendments to the “foreign affiliate dumping” (FAD) rules that were enacted in late 2012. As noted in our December 2012 tax law bulletin, the FAD rules are directed at perceived tax avoidance by foreign-controlled Canadian corporations that acquire or make investments in foreign subsidiaries. If the FAD rules apply, they effectively treat a payment by a foreign-controlled Canadian corporation “down” the chain in respect of a foreign subsidiary as if it were a distribution by the Canadian corporation “up” the chain to its foreign parent, by (1) reducing the paid-up capital of the Canadian corporation’s shares and/or (2) deeming the Canadian corporation to have paid a dividend to which non-resident dividend withholding tax may apply.
Steve Suarez of BLG’s Tax Group has written a detailed article discussing the August 16 proposed amendments, which was published in the September 2, 2013 edition of Tax Notes International. He notes that while the August 16 proposals do not significantly change the scope of the FAD rules, they do propose a number of technical changes that modestly refine the scope of the FAD rules in circumstances where the Canadian tax authorities appear satisfied that no material abuse is likely to arise and, in other cases, make the application of the FAD rules less punitive. The August 16 proposals are generally effective from March 28, 2012 (the date the FAD rules were originally proposed), unless a taxpayer elects to have them take effect on August 14, 2012 (the date draft legislation to implement the FAD rules was released). Comments on the proposals can be submitted to the Department of Finance until October 15, 2013.