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
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Structuring Mining Investments
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