Canadian tax amendments proposed on August 14, 2012 (the Proposals) could adversely affect structures, commonly used in the mining sector, involving Canadian corporations with foreign subsidiaries.
Subject to certain exceptions, the Proposals apply where a foreign corporation controls a Canadian corporation (Canco) that makes an investment in a foreign affiliate (FA) (a foreign corporation in which Canco, together with related parties, directly/indirectly owns at least 10% of the shares of any class). An “Investment” in a FA includes: acquisitions of debt/equity securities; contributions to capital; extensions of maturity/redemption dates of debt or equity securities; conferrals of benefits; and an acquisition of shares of a Canadian corporation, where FA shares comprise more than half of the value of the Canadian corporation’s assets.
If the Proposals apply to an investment, Canco is either deemed to pay a dividend to its foreign parent or the “paid-up capital” (PUC) of Canco’s shares is reduced. A deemed dividend is subject to Canadian withholding tax. A PUC reduction decreases the amount that Canco can distribute to its foreign parent free of withholding tax.
The Proposals generally apply to transactions occurring after March 28, 2012, and could negatively impact a broad range of transactions in the mining sector, as illustrated by the following examples:
- Foreign Subsidiary Investment – A foreign controlled Canco makes an investment in an existing FA, or a newly acquired FA.
- Foreign Corporation Shares Transferred to a Canadian Corporation – Foreign parent transfers shares of a foreign subsidiary to its controlled Canadian subsidiary in exchange for shares and/or debt of the Canadian subsidiary.
- Acquisition of Canadian Target – A foreign corporation (or a private equity fund that invests through a foreign corporation) forms a Canadian acquisition company (AcquireCo) to purchase a Canadian target. FA shares comprise more than half the value of the target’s assets. The Proposals generally deem the acquisition of the target by AcquireCo to be an “investment” by AcquireCo in the FAs of the target.
- Canadian IPO or Other Share Acquisitions – FA shares comprise more than half the value of the assets of a Canco whose shares are offered to the public in an IPO, or are otherwise issued or transferred. If a foreign controlled Canadian corporation (Canadian Purchaser) acquires at least 10% of the shares of any class of Canco (in one transaction or in a series of transactions), the Proposals could treat the Canadian Purchaser as having made an “investment” in the FAs of Canco.
In each of the examples, the applicable “investment” by a Canadian corporation in FAs could result in a deemed dividend to the Canadian corporation’s foreign parent, or a reduction of the PUC of the shares of the Canadian corporation held by the foreign parent, depending on the circumstances. Limited relief may be available, depending on the circumstances, through certain exceptions or possibly a PUC reinstatement following a transfer of FA shares.