Expanding The Reach Of Foreign Affiliate Dumping Rules

The 2019 Federal Budget proposed amendments to broaden the scope of the Foreign Affiliate Dumping Rules (commonly referred to as “FAD” rules). These amendments may lead to withholding taxes and reductions of paid up capital (PUC) for Canadian companies that were previously not subject to these rules.

The FAD Rules Prior to the Budget

The FAD rules were intended to discourage foreign-based multinational corporations from “dumping” foreign affiliates into their Canadian subsidiaries in a manner that erodes the Canadian tax base. These rules are extremely complex.

The FAD rules generally applied when:

1. A non-resident corporation ( NR Parent) controlled a corporation resident in Canada (CRIC) and combined with the NR Parent’s related entities, it owned 25 per cent or more of all the votes or fair market value (FMV) of the CRIC; and