Finance Offers Modest Relief In Foreign Affiliate Dumping Proposals

On August 16, 2013, the Department of Finance released proposed amendments to the "foreign affiliate dumping" (FAD) rules that were enacted in late 2012. As noted in our December 2012 tax law bulletin, the FAD rules are directed at perceived tax avoidance by foreign-controlled Canadian corporations that acquire or make investments in foreign subsidiaries. If the FAD rules apply, they effectively treat a payment by a foreign-controlled Canadian corporation "down" the chain in respect of a foreign subsidiary as if it were a distribution by the Canadian corporation "up" the chain to its foreign parent, by (1) reducing the paid-up capital of the Canadian corporation's shares and/or (2) deeming the Canadian corporation to have paid a dividend to which non-resident dividend withholding tax may apply.