Foreign-Controlled Canadian Corporations Beware

On August 14, 2012, the Department of Finance released draft legislation that includes a revised version of the foreign affiliate dumping proposals tabled with the March 29 Federal Budget. The stated objective of the proposals is to curtail the inappropriate erosion of the Canadian tax base but the rules are much broader than that. The revised proposals have potentially adverse income tax consequences where a corporation resident in Canada (CRIC) that is, or becomes, controlled by a non-resident corporation (a parent) makes an investment in a non-resident corporation (a subject corporation) that is, or becomes, a foreign affiliate of the CRIC. Many submissions have been made to the Department of Finance raising concerns with the proposals and a further draft of the legislation is expected. However, it remains to be seen whether these concerns will be fully addressed.