Tax memo: Legislation tabled October 15, 2012: Foreign affiliate dumping and shareholder loan rules

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Memo No. 2012-36

On October 15, 2012, the Minister of Finance tabled in the House of Commons a Notice of Ways and Means Motion (NWMM) to implement certain March 29, 2012 federal budget proposals (2012 budget or budget proposals), as well as certain other previously announced tax measures. The NWMM contains revisions to the foreign affiliate (FA) dumping rules and shareholder loan rules that were released as a consultation draft on August 14, 2012 (August proposals).

During the consultation period, submissions were made to the Department of Finance (Finance) by PricewaterhouseCoopers LLP (PwC), the Tax Executives Institute, and the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants, among other parties. The NWMM responds to those submissions, making important changes to the FA dumping proposals and shareholder loan rules, mostly of a relieving nature. This Tax memo highlights the changes in these two important areas.

Overview of foreign affiliate dumping rules and shareholder loan rules

In the past, foreign-owned corporations resident in Canada have undertaken transactions in which they acquired shares of a FA from a related foreign party, creating additional debt in Canada - referred to by some as “debt-dumping” or “debt pushdown” transactions. Generally, the result of these transactions is an interest deduction in respect of the debt and the receipt of tax-free dividends from the FA (dividends deemed paid out of the exempt surplus of the FA). Debt-dumping transactions have long been questioned by the government from a policy perspective.

The 2012 budget introduced sweeping rules to curtail debt dumping transactions, although the rules are much broader and also target investments in FAs that Finance considers to be a “disguised distribution.” The transactions targeted by the budget measures involve an “investment” in a FA (also referred to as the “subject corporation” in the rules) by a corporation that is:

  • resident in Canada (CRIC); and
  • controlled by a non-resident of Canada.