Budget 2012: New "Foreign Affiliate Dumping" Measures Introduced

Fresh on the heels of a number of recent court decisions,¹ and based on recommendations made by the Advisory Panel on Canada's System of International Taxation,² Budget 2012 proposes an assortment of anti-surplus stripping measures aimed at discouraging certain foreign affiliate investments (referred to as "foreign affiliate dumping transactions" or "FADTs") by Canadian corporations controlled by non-residents, which the Government asserts inappropriately erode Canada's corporate tax base. However, as discussed in further detail below, the proposed amendments contain a "business purpose" exception designed to keep "legitimate" transactions outside of their purview.

By way of background, the Income Tax Act (Canada) (the "Tax Act") generally affords a deduction with respect to interest expenses incurred by a Canadian taxpayer for purposes of making an equity investment in a "foreign affiliate" (which generally includes any foreign corporation in which the Canadian