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, 2012.
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 non-residents.
The foreign affiliate dumping rules and other important recent Canadian tax developments will be considered in more detail in a forthcoming Davies Perspective.