recognition of foreign tax credits where 
the foreign tax burden is not ultimately 
borne by the taxpayer. However, the 
rules are broadly drafted and can apply in 
unexpected circumstances. Specifically, 
there is no requirement for a direct link 
between the hybrid instrument and 
the transaction generating the FAPI; 
the rules will apply whenever there is 
a hybrid instrument in the same chain 
of ownership as the affiliate earning 
the FAPI. Thus, if a hybrid instrument 
or entity is present in a foreign affiliate 
group, the implications  for all affiliates 
in the same ownership chain need to be 
considered.

The Foreign Affiliate Dumping Rules

The foreign affiliate dumping rules deter 
certain arrangements that allowed 
non-residents of Canada with Canadian 
subsidiaries to undertake transactions 
that reduced their liability for Canadian 
tax without, in the government’s view, 
providing an economic benefit to Canada. 

The foreign affiliate dumping rules apply 
to an “investment” in a foreign affiliate 
by a corporation resident in Canada 
(CRIC) that is controlled by a non-resident 
corporation. An “investment” in a foreign 
affiliate includes:

• an acquisition of shares of the 

foreign affiliate;

• a contribution of capital to the 

foreign affiliate;

• an acquisition of shares of another 

corporation resident in Canada 
whose shares derive more than 
75 percent of their value from 
foreign affiliate shares;

• a loan to or an acquisition of a debt 

of a foreign affiliate; 

• the extension of the maturity date of 

a debt obligation owing by a foreign 
affiliate to a CRIC; and 

• the extension of the redemption, 

acquisition, or cancellation date of 
shares of a foreign affiliate held by 
a CRIC. 

Certain trade debts and debts acquired 
from an arm’s-length person in the 
ordinary course of business are 
excluded. In certain cases, an election 
is available to treat a debt obligation 
as a “pertinent loan or indebtedness” 
(PLOI). The foreign affiliate dumping 
rules do not apply to the PLOI, but the 
CRIC must include in income interest on 
the PLOI at a prescribed rate (less any 
interest actually charged pursuant to the 
terms of the debt obligation). 

Where the rules apply, the following 
consequences may result:

• If the CRIC paid non-share 

consideration for the investment, 
the CRIC is deemed to have paid 
to its foreign parent a dividend in 
the amount of such consideration. 
Canadian withholding tax applies 
to the deemed dividend. In certain 
circumstances, under an offset 
mechanism, the paid-up capital 
in the shares of the CRIC can be 
reduced to decrease or eliminate 
the deemed dividend. 

• If the CRIC issued shares in 

consideration for the investment, 
the paid-up capital in such shares 
is reduced by the amount of the 
investment in the foreign affiliate. 
The elimination of paid-up capital 
restricts thin capitalization room 
to limit the ability of the CRIC 
to deduct interest expense on 

cross-border debt and restricts the 
amount that can be repatriated as 
a return of capital free of Canadian 
withholding tax. 

There are two main exceptions that will 
preclude the application of the rules 
where a CRIC makes an investment in 
a foreign affiliate. The first exception 
is intended to exempt investments 
that are strategic expansions of a 
Canadian business abroad; however, this 
exception is unlikely to be useful since 
its scope is very narrow. The second 
exception applies where the investment 
is part of an internal reorganization that 
is not considered to result in a new 
investment in a foreign affiliate. 

Where the paid-up capital in the shares 
of the CRIC is reduced under the rules, 
such paid-up capital can be reinstated 
immediately before:

• a return of capital by the CRIC to its 

foreign parent, or 

• an in-kind distribution of: 

– the shares of the foreign affiliate 

that constituted the original 
investment, 

– shares of another foreign affiliate 

substituted therefor, or 

– the proceeds of disposition of 

such shares or certain other 
distributions from another foreign 
affiliate. 

The paid-up capital reinstatement before 
the return of capital avoids a deemed 
dividend arising on the transaction to the 
extent that the amount distributed on 
the return of capital exceeds the paid-up 
capital in the shares of the CRIC. 

© 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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