Additionally, a holding corporation may 
be used to gain access to tax treaties 
and bilateral investment agreements 
entered into between the country in 
which the holding corporation is resident 
and the country in which the mineral 
interest is to be developed.

However, the use of holding corporations 
presents a number of issues. Many 
jurisdictions are becoming more 
aggressive in challenging international 
holding corporations based on either 
specific legislation or more general rules 
such as substance over form, beneficial 
ownership, and treaty abuse. This is 
particularly the case where the holding 
corporation does not carry on active 
business operations of its own. 

A number of jurisdictions have also 
introduced legislation to tax sales of 
the shares of a foreign corporation that 
derive a significant portion of their value 
from domestic assets, operations, or 
shares of a domestic company (so-called 
“indirect sales”). Typically,  the source 
country will impose liability for any 
tax unpaid by the vendor (and related 
interest and penalties) on the purchaser 
or the domestic (target) entity.

International Financing Corporations

Most inter-affiliate payments (including 
interest, rents, royalties, and insurance 
premiums) are exempt from FAPI 
treatment (and thus not taxable in 
Canada) if the payer is a foreign affiliate 
in which the Canadian taxpayer has 
an interest consisting of at least 10% 
of the votes and value of the foreign 
affiliate and the expense is deductible 
from the active business income of the 
payer. It is thus common for a Canadian 
multinational to establish an affiliate 
in a low-tax jurisdiction to finance its 

foreign operations. Similar benefits can 
be achieved using international leasing, 
licensing, or captive insurance affiliates. 
If the financing affiliate is resident in a 
treaty or TIEA country and the payer is 
both resident in and carries on business 
in (another) treaty country, the income 
earned by the financing entity is exempt 
surplus and can be repatriated to Canada 
free of tax. This allows for a permanent 
tax saving to the Canadian parent. 

Non-Resident Investors

Acquiring Assets Versus 

Acquiring Shares

A non-resident investor that intends to 
start up a mining business in Canada, 
or to acquire an existing business, must 
consider:

• whether it will acquire the assets 

directly or acquire shares of a 
corporation holding the assets, and

• whether it will carry on business 

in Canada directly or through a 
Canadian corporation.

An asset purchase may be advantageous 
to the purchaser from a Canadian income 
tax perspective because it will allow the 
purchaser to claim deductions, such as 
CCA and resource deductions, using the 
fair market value of the assets at the time 
of purchase rather than their historical 
cost to the vendor. An asset purchase 
may, however, result in the realization 
of ordinary income to the vendor, as 
opposed to a capital gain. In particular, 
the sale of intangible mining rights may 
give rise to ordinary income. Asset sales 
are more complicated than share sales 
and frequently require government 
consents and third-party approvals.

There may also be an opportunity 
to increase (or bump) the tax cost 
of non-depreciable capital assets 
(land, other than Canadian resource 
property, and shares of a subsidiary) 
held by the acquired corporation to 
their fair market value subsequent 
to the acquisition. (See 

Structuring 

Mining Investments – Corporate 
Reorganizations

.) The tax benefits 

of a bump are limited because it 
is not possible to increase the tax 
cost of property in respect of which 
a taxpayer may claim deductions in 
computing income. 

However, the bump can be of great 
significance to a foreign purchaser of 
a Canadian corporation where the 
Canadian corporation owns subsidiaries 
that carry on business only in foreign 
jurisdictions. A foreign purchaser in such 
circumstances may want to:

• incorporate a Canadian corporation to 

purchase the Canadian target; 

• wind up the Canadian target (or 

amalgamate the Canadian purchaser 
and the Canadian target) in order to 
bump the tax cost of the shares of 
the foreign subsidiaries; and

• transfer the foreign subsidiaries out 

from under the Canadian target. 

The reason for this form of transaction 
is that it may be more efficient for the 
foreign purchaser to hold such foreign 
subsidiaries directly or in a dedicated 
offshore holding structure. (For 
example, such a corporate organization 
avoids an additional layer of Canadian 
withholding tax on future repatriations.) 
The bump may allow the purchaser to 
effect the transfer without incurring 
any significant Canadian tax. This 

© 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