Canada: Proposed legislative amendments to foreign affiliate dumping rules

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Canada: Proposed legislative amendments to foreign affiliate dumping rules

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Sabrina Wong and Atbin Dezfuli, Blake Cassels & Graydon

On August 16 2013, the government of Canada introduced draft legislative proposals (August 16 proposals) to amend its foreign affiliate (FA) dumping rules. The measures may be introduced into Parliament as early as autumn 2013.

The FA dumping rules generally apply where a corporation resident in Canada (CRIC) controlled by a non-resident corporation (parent) makes an investment in a corporation that is or becomes an FA of the CRIC. Where CRIC gives non-share consideration for acquiring the investment, a deemed dividend to its parent can be triggered that will be subject to Canadian withholding tax, except to the extent it reduces the CRIC's paid-up capital (PUC offset rule). Where the CRIC gives its shares as consideration, the PUC of such shares are deemed to be nil.

The August 16 proposals contain changes to the FA dumping rules generally of a relieving nature, including:

  • Limiting the application of the FA dumping rules where a CRIC makes an investment in an FA before CRIC becomes controlled by the parent;

  • Making the application of the PUC offset rule completely automatic and significantly amending the scope of the dividend substitution election (the QSC election) that allows other Canadian members of the corporate group to be treated as having paid the dividend;

  • Extending the application of the rule that reinstates previously reduced PUC in certain circumstances (the PUC reinstatement rule), including expanding the types of FA investments to which the rule could apply; and

  • Broadening the rules which except certain amalgamations of taxable Canadian corporations from the FA dumping rules.

However, the August 16 proposals also include amendments aimed at preventing taxpayers from using certain relieving provisions to avoid the application of the FA dumping rules.

The impact of the rules and the proposed changes should be carefully considered by any foreign investor planning an acquisition of, or investment in, any Canadian company with foreign operations.

Sabrina Wong (sabrina.wong@blakes.com) and Atbin Dezfuli (atbin.dezfuli@blakes.com)

Blake, Cassels & Graydon

Tel: +1 416 863 2400 and Fax: +1 416 863 2653

Website:www.blakes.com

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