Foreign Affiliate Dumping
Canada provides a participation exemption (exempt surplus) on
repatriation of earnings from foreign affiliates. Canada
simultaneously provides interest deductibility for amounts borrowed
to invest in shares of foreign affiliates. Additionally, in our tax
treaties, Canada typically requires five per cent or more
withholding tax on dividends paid by Canadian companies to foreign
parent corporations.
In the past, multinational parent companies wishing to extract
surplus from a Canadian subsidiary could implement planning to sell
or "dump" the shares of their non-Canadian subsidiaries
to the corporation resident in Canada (CRIC) in exchange for cash
and/or an interest-bearing vendor-take promissory note. The cash or
promissory note paid was not subject to withholding tax. The
interest on debt would shelter the taxable income of the Canadian
operating company. Canada receives no withholding tax on the cash
payment and reduced income tax on
