Specific Application Issues for Mining 
Corporations

Net Smelter Returns and Net Profits Interests

A junior mining corporation will frequently sell 
a promising mining property to a more senior 
mining corporation in exchange for an NSR or an 
NPI. Similarly, a senior mining corporation may 
sell a marginal property that it does not intend 
to actively exploit itself to another senior mining 
corporation for an NSR or NPI.

Income realized by a controlled foreign affiliate on 
the sale of a foreign resource property and royalty 
income from an NSR or an NPI may be FAPI. Such 
income should not be FAPI where the income is 
incidental to the active business of the affiliate.

In addition, income from an NSR or an NPI should 
be active business income where the Canadian 
taxpayer owns at least a 10% interest (by both 
votes and value) in the entity paying the royalty. 
However, a specific anti-avoidance rule targets 
structures where such an ownership interest is 
created principally to avoid taxes (as may be found 
to be the case where the economic benefits from 
the equity stake are nominal compared with the tax 
benefits of avoiding FAPI status on the royalties). 

International Holding Corporations

Holding corporations incorporated in foreign 
jurisdictions can be used to help lessen:

• withholding taxes by the jurisdiction in  

which operations are carried on,

• Canadian taxation on distributions, and
• capital gains tax on exit. 

Distributions may qualify for an exemption  
or credit where they are paid out of 
exempt, hybrid, or taxable surplus, as  
described above.

A holding corporation is almost always incorporated 
in a jurisdiction that imposes little or no tax on 
certain types of income that are relevant to 
the Canadian corporation, such as dividends and 
capital gains.

A holding corporation can be used to transfer 
earnings arising in one jurisdiction that constitute 
hybrid or taxable surplus to another jurisdiction 
without any immediate payment of Canadian tax. 
Many mining corporations either pay low rates of 
tax on income earned in the jurisdiction of operation 
or enter into agreements with the government of 
the jurisdiction of operation that allow for some 
relief from taxation. Where the income generated 
by such activities gives rise to taxable surplus, the 
repatriation of the funds to Canada might result in 
additional Canadian tax.

Dividends paid to a holding corporation will not 
be subject to Canadian tax and may be subject 
to little or no tax in the jurisdiction of the holding 
corporation. The use of a holding corporation 
therefore defers tax on the earnings until they are 
ultimately repatriated to Canada.

A holding corporation may also be used to  
defer the payment of Canadian tax on capital  
gains realized from a sale of shares of a 
foreign affiliate where the shares constitute 
excluded property.

© 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.

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 A Guide to Canadian Mining Taxation