Comments on Ottawa’s “foreign affiliate dumping” budget rules due today

Adrienne Oliver

Today is the deadline for comments to the Canadian Department of Finance on new “foreign affiliate dumping” rules. Click here to see the invitation for comments.

Lexpert spoke with Adrienne Oliver, co-chair of Norton Rose’s Canadian tax team, about the proposed rules and the improvements her and her clients are hoping to see in their next iteration.

The current draft legislation for these proposals came out on Aug. 14, and they form part of the federal government’s March 2012 budget. Oliver says these proposals are probably the most significant change in tax policy in the budget.

In a common scenario for tax practitioners, the government’s initial proposals were aimed at stopping certain tax avoidance transactions but the rules as drafted had a number of unintended consequences.

For Oliver, the current rules would hurt international companies doing valid business activities in Canada:

It’s not the time to make it more difficult to execute deals for companies doing business in Canada. This has been the effect since the budget was introduced in March, and it’s not what the Canadian economy needs.

The proposed changes were intended to limit the ability of foreign-controlled Canadian companies from reducing Canadian taxes by incurring debt to acquire offshore investments, Oliver explains. Essentially, a Canadian subsidiary of a foreign multinational would acquire assets from its foreign parent to reduce its taxes.

The government introduced legislation in the [March 2012] budget with the stated intention of shutting down those kinds of transactions, but when you look at the drafting of the provisions, it was much broader and picked up basically any kind of investment by a Canadian sub of a foreign company in a foreign affiliate.

After an initial round of consultation, new revised rules came out in August that, according to Oliver,

…responded to a lot of concerns that were raised in the tax and business community, but also raised a bunch of new issues…[The current rules are still] going to provide a real disincentive to structuring foreign investments through Canada and will make even ordinary course transactions very difficult for foreign multinationals that have Canadian operations…Essentially the Department of Finance has taken an elephant gun to kill a fly with the way they have drafted these rules and unless we can deal with the uncertainty, it is going to make life difficult for any multinational with a Canadian sub.

Oliver says the current rules could affect foreign companies that are acquiring a Canadian multinational that owns foreign entities, as well as mining companies that are created in Canada (i.e. TSX listed) and that have operations offshore. Many of these mining companies, Oliver points out, have:

…very little nexus to Canada, other than the head office, [but] if they are acquired by a foreign company they are definitely going to be impacted by these rules. The rules do provide a safe harbour, that is intended to provide an exception where there is a real Canadian business presence, and in the mining sector where basically it is a Canadian company and TSX listed for convenience purpose, and there is not a lot of substance in the Canadian operation, companies like that are not going to be able to take advantage of this safe harbour at all.

We are perceived around the world as being a very favourable jurisdiction to IPO mining companies with assets around the world, and this would certainly impact the viability of that kind of structure. There is a certain loss of jobs in Toronto and elsewhere in the country that are dependent on that IPO, mining listing market.

Despite the fact that the deadline for comments is today, Oliver predicts that this is not the end:

The government’s objective is to get the bill passed as soon as possible but this is so broad reaching and significant that I would be surprised if the next draft was perfect.

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