active business income earned by a foreign affiliate should 
not be taxable in Canada until a dividend is paid to a Canadian-
resident corporation or individual. Further, dividend income 
received by a Canadian corporation from a foreign affiliate 
that is resident in and carries on an active business in a 
jurisdiction with which Canada has concluded an income 
tax treaty or a tax information exchange agreement 
(TIEA) should be exempt from Canadian income tax. 
(See 

Structuring Mining Investments – Foreign Affiliates

.) 

Income of a foreign entity that is not a foreign affiliate 
is subject to Canadian tax only when the income is 
distributed to Canada by way of dividend.

The exemption from Canadian tax is available only 
where the foreign corporation is a resident of the 
foreign jurisdiction under Canadian domestic law 
as well as an applicable income tax treaty. Under 
Canadian domestic law, a foreign corporation 
may be considered to be a resident of Canada 
if the central management and control of the 
foreign corporation is exercised in Canada. 
To substantiate that the foreign entity is 
not resident in Canada, it is critical that the 
directors (or equivalent) of the foreign affiliate 
meet regularly in that foreign jurisdiction, 
that they have the authority to manage 
and oversee the affairs of the corporation, 
and that they exercise that authority 
independently. The directors can 
consider the wishes of the Canadian 
shareholders in arriving at their 
decisions, but they must still exercise 
independence in deciding whether or 
not to implement those wishes. 

Distributions from a foreign 
corporation to a Canadian 
shareholder may be subject 
to foreign withholding tax, 
and a gain realized on a sale 
of the shares of the foreign 
corporation (including, in 
some jurisdictions, an 
indirect sale) may also 
be subject to foreign 
income tax under local 
domestic law, as well as 

© 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.

 

Structuring Mining Investments 

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