jurisdiction must be able to establish 
that it is resident under the treaty in 
that jurisdiction and is the beneficial 
owner of the dividend. The application 
of Canada’s general anti-avoidance 
rule (GAAR) should also be considered.

Equity contributions made to the 
corporation increase the corporation’s 
paid-up capital balances, subject to 
the foreign affiliate dumping rules. 
Distributions made by a private 
Canadian corporation (which includes 
a subsidiary of a foreign public 
corporation) out of paid-up capital 
to a non-resident corporation are 
treated as a return of capital that is 
not subject to Canadian withholding 
tax. Distributions out of paid-up capital 
will, however, reduce the adjusted cost 
base of the shares and, as a result, 
may increase the gain otherwise 
realized on the sale of the shares of 
the corporation in the future. Unlike 
many other jurisdictions, Canada 
allows for distributions from paid-up 
capital before the payment of taxable 
dividends. Accounting capital is not the 
same as paid-up capital determined for 
tax purposes. Paid-up capital is based 
on legal stated capital. Therefore, 
legal counsel should determine stated 
capital and paid-up capital before the 
corporation makes a return of capital, 
to ensure that the amount distributed 
is paid-up capital and not deemed 
to be a dividend that is subject to 
withholding tax.

Financing

Interest expense paid or payable by a 
corporation on borrowed money used 
for the purpose of earning income from 
a business or property in Canada is 

deductible for Canadian tax purposes. 
The thin capitalization rules, however, 
may limit the deduction of interest 
paid by a corporation to non-resident 
parties that are related to the Canadian 
corporation or that hold a substantial 
interest in the Canadian corporation. 
In particular, the interest deduction of 
the Canadian corporation will be reduced 
to the extent that the corporation’s ratio 
of interest-bearing debt owing to such 
non-resident persons to its equity held 
by related non-residents exceeds 1.5:1. 
A guarantee is not considered to be a 
loan for these purposes. 

Non-participating interest payments 
made by a resident of Canada to 
foreign arm’s-length lenders are not 
subject to withholding tax. However, 
interest expenses denied pursuant to 
the thin capitalization rules are deemed 
to be dividends subject to Canadian 
withholding tax.

Where financing is to be obtained 
from related corporations, interest 
payments are subject to withholding 
tax at a statutory rate of 25% subject 
to reduction by an applicable tax treaty. 
The reduced rate varies, depending 
on the treaty, but is typically 10% or 
15%. For non-participating interest 
payments made to US residents, the 
withholding rate is reduced to zero 
under the Canada-US treaty. Foreign 
investors that wish to finance their 
Canadian operations from internal 
sources may be able to benefit from 
the exemption under the Canada-US 
treaty by providing the funds through 
a US-resident entity. However, such 
financing arrangements will be subject 
to the limitation-on-benefits article of 

the Canada-US treaty and to GAAR. 
To qualify for the treaty rate, the 
ultimate parent must be publicly listed 
on a major US stock exchange and 
meet minimum trading requirements, 
or it must be majority-owned by 
US or Canadian residents. The zero 
withholding rate may also apply if the 
US entity carries on an active trade or 
business that is sufficiently similar and 
is substantial relative to the Canadian 
business. This may be the case where 
a multinational has operating mines in 
both countries. 

Exit Planning

Capital gains realized by non-residents 
on the sale of taxable Canadian property 
are subject to tax in Canada. Taxable 
Canadian property includes shares of 
a Canadian or a foreign corporation 
that derives its value principally from 
Canadian resource properties. A 
number of tax treaties exempt the 
sale of such shares from tax in Canada 
where the resource property is used 
by the corporation in its business 
operations. This exemption is not 
available in all treaties. In particular, 
it is not available in Canada’s treaties 
with the United States and Japan. In 
these cases, it may again be possible 
to use an intermediary holding 
corporation in a treaty jurisdiction 
to reduce the Canadian taxes 
otherwise payable on the disposition 
of the shares. Luxembourg and the 
Netherlands are jurisdictions that have 
tax treaties with Canada containing 
this favourable provision, and are 
also otherwise favourable holding 
corporation jurisdictions.

© 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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