Global Tax Alert | 22 August 2013

Canadian Government proposes changes to foreign affiliate dumping rules

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On 16 August 2013, Canada's Federal Government proposed draft legislation to introduce a number of revisions to the foreign affiliate dumping (FAD) rules that were first announced as part of the 2012 federal budget and enacted on 14 December 2012 pursuant to Bill C-45. These revisions reflect certain lingering concerns that were raised during consultations on the various versions of the proposals before and even after enactment. This consultation process continues, in that interested parties are invited to provide comments on the draft legislation by 15 October 2013.

The press release announcing the draft legislation highlights the following focus areas:

  • Reducing impediments to corporate acquisitions by limiting the application of the rules where a corporation resident in Canada (CRIC) makes an investment in a foreign affiliate before that corporation becomes controlled by a nonresident corporation (essentially, by introducing a “safe harbor” to preclude the application of the rules to investments made when no nonresident corporation holds 25% or more of the CRIC's votes or value, and otherwise).
  • Extending the rule reinstating a CRIC's paid-up capital, where the CRIC distributes to its nonresident shareholder amounts it has received as interest on or from the repayment or sale of certain debt obligations owed to the CRIC by the foreign affiliate.
  • Easing compliance requirements by making the application of the “paid-up capital offset” rule automatic.
  • Preventing taxpayers from using certain relieving provisions within the FAD rules in a manner that is inconsistent with the underlying policy by, for example, undertaking transactions to take advantage of both the corporate reorganization provision and the exception from the rules for certain debts.

However, the draft legislation would also introduce a number of other changes to the rules referred to above and others, including revisions to the rules that determine which nonresident corporation is considered to control a CRIC and thus to be the parent (introducing a new “deemed control” rule), and certain expansions to the exception for more closely connected business activities, certain reorganizations involving amalgamations, and the “indirect funding” rule that permits loans to be made to a foreign affiliate through another foreign affiliate.

The various changes contemplated by the draft legislation would generally be applicable back to 29 March 2012. The changes relating to pertinent loan or indebtedness conversions (those mentioned in the last bullet above) would be applicable only prospectively, as would certain restrictive features of the revised paid-up capital “reinstatement” rules (mentioned in the second bullet), and the new “deemed control” rules.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto
  • Derek Alty
    +1 416 943 3860
  • Yi-Wen Hsu
    +1 416 943 5310
  • Mark Kaplan
    +1 416 943 3507
  • Heather Kerr
    +1 416 943 3162
  • Terry McDowell
    +1 416 943 3600
  • Trevor O'Brien
    +1 416 943 5435
  • Linda Tang
    +1 416 943 3421
  • Andy Tse
    +1 416 943 3024
Ernst & Young LLP (Canada), Montreal
  • Albert Anelli
    +1 514 874 4403
  • Angelo Nikolakakis
    +1 514 879 2862
  • Nicolas Legault
    +1 514 874 4404
  • Nik Diksic
    +1 514 879 6537
Ernst & Young LLP (Canada), Calgary
  • Karen Nixon
    +1 403 206 5326
  • Mark Coleman
    +1 403 206 5147
Ernst & Young LLP (Canada), Vancouver
  • Eric Bretsen
    +1 604 899 3578
Ernst & Young LLP, Canadian Tax Desk, New York
  • Andrea Lepitzki
    +1 212 773 5415

EYG no. CM3749