Foreign Operations

For a Canadian resident carrying on 
mining operations in a foreign jurisdiction, 
an important decision is whether it is 
better, from a tax perspective, to carry on 
the activity through a branch or through 
a foreign entity. While most foreign 
jurisdictions will allow the investor to 
choose the vehicle through which it 
prefers to carry on business, some 
will require a non-resident to set up a 
subsidiary in the particular jurisdiction to 
undertake the mining activities. From a 
Canadian tax perspective, the difference 
between operating through a branch and 
operating through a foreign entity can 
be significant. 

Where a Canadian corporation carries 
on business through a foreign entity, 
the Canadian tax consequences will 
depend greatly on whether the foreign 
entity is treated as a corporation for 
Canadian tax purposes. In making this 
determination, the legal characteristics 
of the foreign entity under the laws 
of the foreign jurisdiction must be 
compared with the legal characteristics 
of entities in Canada. The entity should 
be classified in the same manner as the 
Canadian entity with which it shares the 
most similarities. It is sometimes very 
difficult to determine the appropriate 
classification of the foreign entity. 

Operation Through a Branch 

Canadian corporations operating in 
foreign jurisdictions through a branch 
are subject to Canadian tax on the 
income earned by that branch, whether 
or not any funds are remitted to 
Canada. Operating through a branch 
may be advantageous during the initial 
exploration and start-up phases of a 
mining project, since losses incurred by 
the branch may shelter other income 

earned by the Canadian corporation from 
Canadian tax. However, a subsequent 
transfer of the assets of the foreign 
branch to a foreign subsidiary would be 
a taxable transaction for Canadian tax 
purposes. Any proceeds of disposition 
of a foreign resource property would 
be deducted from the ACFRE account of 
the taxpayer and may result in income 
subject to tax. Under the ITA, proceeds 
of disposition of a foreign resource 
property are on income account and not 
on capital account. (See 

Deductions, 

Allowances, and Credits – Foreign 
Resource Expenses

.)

There is therefore a trade-off between 
tax payable in the future and the upfront 
deduction of losses. There is also a risk 
that the assets of the branch may not 
be transferable to a corporation on a 
tax-deferred basis under foreign law. 
Therefore, theoretically, assets should 
be transferred at an early stage before a 
significant appreciation in value occurs. 
This is easier said than done. In mining, 
one successful drill hole may turn a 
property with nominal value into one 
of significant value.

A transfer of property may also result in 
other taxes such as sales and transfer 
taxes. Consequently, the potential liability 
for such taxes must be taken into account 
in considering which vehicle to use at the 
time of commencement of operations. In 
addition, a subsequent transfer of assets 
may require government approvals, 
as well as consents from third-party 
participants in the mining operations. 

Where the income earned by the 
branch is subject to tax in the foreign 
jurisdiction, a foreign tax credit may 
reduce the Canadian federal income 
tax liability and prevent double taxation. 
A foreign tax credit may be claimed 
for the income taxes paid or payable 

to a foreign jurisdiction in respect of 
the business profits of the branch to 
the extent that the foreign taxes do 
not exceed the Canadian income taxes 
otherwise payable on those profits. 
To the extent that the foreign income 
taxes paid to a jurisdiction exceed the 
Canadian income taxes otherwise 
payable on branch profits, the unused 
credit may be carried back for 3 years 
and forward for 10 years in the case of 
business-income taxes.

These carryforward and carryback 
provisions do not apply to taxes that are 
not in respect of income earned by the 
taxpayer from a business carried on in the 
country (e.g., non-business-income taxes, 
such as foreign withholding taxes on 
dividends, interest, and royalties). Further, 
the foreign tax credit is available only in 
respect of taxes assessed, based on a 
measure of income or profits. Therefore, 
royalties, stamp duties, capital taxes, 
and sales, value-added, or turnover taxes 
are not eligible for the foreign tax credit.

While foreign oil and gas production 
taxes paid to a foreign country may 
be eligible for the foreign tax credit, 
no similar relief currently exists for 
production taxes paid in respect of other 
types of resources, such as metals.

Provincial foreign tax credits are available 
only for non-business-income taxes paid 
or payable, since foreign business profits 
should not be subject to tax in any 
Canadian province. 

Operation Through a Foreign 

Corporation

Where foreign operations are expected 
to be profitable, there may be significant 
advantages to the use of a foreign 
subsidiary corporation over a branch. 
As described in more detail below, the 

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms 
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

36 

|

 A Guide to Canadian Mining Taxation