feature of the Canadian tax system is 
particularly useful on a takeover where 
the target has no Canadian operations 
but is a holding corporation that has only 
subsidiaries with mining properties 
situated in other jurisdictions; such a 
corporate organization is very common 
for junior and intermediate mining 
companies listed on a Canadian stock 
exchange. However, the bump is not 
available where the foreign purchaser 
issues its own shares as consideration 
for the acquisition if shares of the 
foreign purchaser derive more than 10% 
of their fair market value from bumped 
property. (See 

Structuring Mining 

Investments – Wind-Ups of Subsidiaries –  
Election to Bump Cost of Acquired 
Property

.)

Where a Canadian corporation owns 
shares of foreign subsidiaries, two other 
considerations may affect the decision 
of a non-resident investor to acquire 
shares of the Canadian corporation:

• The foreign affiliate dumping rules 

may apply in certain cases. In 
particular, certain Canadian public 
companies do not undertake 
significant direct mining operations 
but act as holding companies for 
foreign subsidiaries that carry 
on mining activities in foreign 
jurisdictions. The foreign affiliate 
dumping rules may apply where a 
foreign corporation acquires such a 
Canadian public company through 
the use of a Canadian acquisition 
corporation.

• Certain rules attempt to ensure that 

an unrelated party cannot obtain 
aggregate tax attributes of a foreign 
affiliate on an acquisition of control 
in excess of the fair market value 

of the foreign affiliate’s shares. Two 
rules work together to achieve this 
objective:
– On an acquisition of control of a 

Canadian corporation, the exempt 
surplus of the corporation’s 
top-tier foreign affiliates is reduced 
immediately before the acquisition 
of control to the extent that 
the aggregate of each affiliate’s 
tax-free surplus balance and the 
adjusted cost base of the affiliate’s 
shares exceeds the fair market 
value of those shares. The top-tier 
foreign affiliate’s tax-free surplus 
balance is the total of the top- 
and lower-tier foreign affiliates’ 
surplus balances to the extent 
that a dividend paid by the top-tier 
foreign affiliate would be fully 
deductible.

– On a tax-deferred wind-up of 

the Canadian corporation or an 
amalgamation, the bump of the 
shares of the foreign affiliate can 
be restricted. More specifically, 
the bump room in respect of the 
foreign affiliate’s shares is reduced 
by the foreign affiliate’s tax-free 
surplus balance. 

Operating in Canada Through 

a Branch

A foreign corporation may operate in 
Canada directly as an unincorporated 
business, or through a joint venture or 
partnership structure. (See 

Structuring 

Mining Investments – Partnerships and 
Joint Ventures

.) In these circumstances, 

the foreign corporation will be subject 
to tax in Canada on income from its , 
similar to a Canadian corporation. The 
branch will be treated as a separate and 

independent entity for the purposes of 
determining its Canadian-source income 
subject to tax in Canada, and expenses 
incurred by the head office may be 
allocated to the branch under general 
transfer pricing principles. Since Canada 
does not have a loss consolidation 
regime (see 

Overview of the Canadian 

Tax Regime – Income Taxation – 
Utilization of Losses

), losses incurred 

by the branch cannot be used to offset 
any income earned by other Canadian 
corporations held by the foreign investor 
in Canada. Foreign corporations carrying 
on business in Canada through a branch 
are required to file a corporate tax return 
annually with the CRA. 

Foreign corporations carrying on 
business in Canada are also subject to 
a branch profits tax, which is a statutory 
25% tax on after-tax income of the 
branch that is not reinvested in Canadian 
business assets. The tax rate is reduced 
under Canada’s tax treaties to the rate 
of withholding tax imposed on dividends 
paid by a Canadian subsidiary to a parent 
in the jurisdiction of the parent (usually 
5%). Some treaties also provide for 
an exemption for the first $500,000 
of earnings subject to the branch 
profits tax. An exemption from branch 
profits tax is available under the ITA for 
corporations whose principal business is 
mining iron ore in Canada.

A key advantage to the use of a branch 
is that the losses incurred by the branch 
may be used to shelter other sources 
of income from tax in that foreign 
jurisdiction. This structure may not be 
advantageous, however, where the 
foreign jurisdiction does not have an 
exemption system and the corporate 
tax rate in that jurisdiction is higher than 

© 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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