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