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.

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 A Guide to Canadian Mining Taxation