the Canadian corporate tax rate. Further,
the foreign corporation will have limited
control over the payment of Canadian
branch profits tax (which is determined
by formula regardless of actual transfers
of cash to the head office) as compared
with the payment of dividends by a
Canadian corporation. The branch tax
formula may hamper the ability to
adequately plan in jurisdictions with a
foreign tax credit system.
A Canadian branch can be incorporated
into a Canadian subsidiary on a tax-
deferred basis for Canadian tax
purposes. The new subsidiary inherits
the CCA and resource deductions
(albeit subject to restrictions for
resource deductions). (See
Deductions,
Allowances, and Credits – Successor
Corporation Rules
.) However, any loss
carryforwards of the branch cannot be
transferred to the Canadian subsidiary or
otherwise offset against income of any
Canadian-resident entity or any other
foreign entity with a Canadian branch.
The tax consequences in the foreign
corporation’s country of residence of
incorporating the assets must also be
considered. Such consequences may
include the recognition of gain and the
recapture of branch losses previously
deducted in computing the income of
the foreign corporation.
The 2013 federal budget proposed to
extend the domestic thin capitalization
rules for taxation years beginning after
2013 to non-resident corporations
that carry on business in Canada
through a branch. Under the proposal,
the Canadian branch will be denied a
deduction for interest paid or payable
on “outstanding debts to specified
non-residents” to the extent that such
debts exceed 1.5 times its “equity
amount.” In this regard:
• “outstanding debts owing to
specified non-residents” will include
a loan used by the Canadian branch
from any non-resident that does not
deal at arm’s length with the non-
resident corporation (including a debt
from the non-resident corporation
itself); and
• the “equity amount” of the
non-resident corporation will be
40% of the amount of the difference
between:
– the cost of its property used in
carrying on business in Canada,
and
– the total of its debts outstanding
(other than an outstanding debt
to specified non-residents of the
corporation).
Accordingly, a debt-to-asset ratio of
3:5 will apply for Canadian branches.
This parallels the 1.5:1 debt-to-equity
ratio used for Canadian subsidiaries
(discussed below).
If the thin capitalization rule denies
the deduction of interest expense by
the Canadian branch, the non-resident
corporation may bear additional branch
tax liability. As branch tax and dividend
withholding tax function similarly, the
treatment of denied interest expense
under the thin capitalization rule will
be treated similarly for both branches
and subsidiaries of non-resident
corporations.
Operating in Canada Through
a Subsidiary
Corporations organized under the laws
of Canada or a province of Canada are
Canadian-resident corporations for the
purposes of the ITA and therefore subject
to tax in Canada on their worldwide
income. All transactions between the
Canadian corporation and its foreign
parent or other related companies must
take place on arm’s-length terms and
conditions, and must be supported
by contemporaneous transfer pricing
documentation. Losses incurred by
the corporation can be carried back for
3 taxation years or carried forward for
20 taxation years from the year in which
the loss was incurred.
Repatriation of Profits
Dividends paid by a Canadian
corporation to a non-resident person are
subject to withholding tax at a statutory
rate of 25% under Canadian domestic
law. The domestic rate may be reduced
to as low as 5% under Canada’s tax
treaties. Canada has an extensive tax
treaty network, comprising some 90
treaties currently in force; however, this
obviously leaves many foreign investors,
or potential investors, without direct
access to treaty benefits in their country
of residence. A foreign investor in a
non-treaty country may nevertheless
be able to use an intermediary holding
corporation in a treaty jurisdiction to avail
itself of reduced rates of withholding
tax on dividends paid from Canada or
to reduce tax on a future disposition.
In order for the treaty-reduced dividend
withholding tax rate to apply, the
corporation incorporated in the treaty
© 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.
46
|
A Guide to Canadian Mining Taxation