CBA: Foreign affiliate dumping rules could be improved
Some recommendations on avoiding punitive tax consequences.
Canada’s foreign affiliate dumping rules were first introduced in 2012, designed to prevent foreign enterprises from “dumping” foreign affiliates into their Canadian subsidiaries in a way that would erode the Canadian tax base. Since then the so-called FAD rules have gone through several rounds of technical changes and are now, according to the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, “largely settled” if somewhat cumbersome.
“Overall, the current law, while imperfect, reflects a reasonable balance between the originally expressed concern about base erosion and the need for a reasonable, workable rule that, while extremely complex, does not give rise to anomalous or punitive results in many cases.”
The Committee is not convinced that amendments in the 2019 federal budget will ameliorate the existing rules’ shortcomings, and makes several recommendations that focus on “how to make the rules as workable as possible, and how to minimize collateral damage”, including:
- Adding a relieving provision that will “turn off” the foreign affiliate dumping rules in situations where a controlling Canadian resident becomes non-resident, or when shares are bequeathed to a non-resident
- Adding a de minimus exception for smaller businesses
- Adding a relieving rule that focuses on whether Canadian tax considerations influenced particular investment decisions
- Not enacting subsection 212.3(26) as written, and instead enacting a specific anti-avoidance rule to deal with non-resident beneficiaries of trusts
The amendments introduce the concept of a NAL group – a so-called “group of persons” the members of which are non-resident persons that do not deal at arm’s length with each other. The amendments would extend the FAD rules to corporations resident in Canada that are controlled or are deemed to be controlled by a NAL group, which the Committee calls “a distinct and highly troubling” aspect of the changes. The Committee questions its “appropriateness, especially in the setting of the FAD rules, where the consequences of an incorrect judgment are the potential application of punitive tax consequences (withholding tax on a deemed cross-border dividend to the so-called ‘parent’ just because a corporation resident in Canada invested in a foreign affiliate.”)
Along with these and other recommendations regarding the FAD rules, the Committee also comments on proposed changes to the commercial transaction exception to the derivative forward agreement definition and transfer pricing measures also contained in the 2019 federal budget, suggesting improvements to both areas.