The Canadian mining industry views proposed amendments to the Foreign Affiliate Dumping rules released this month by Canada’s Department of Finance as a positive step towards reducing significant impediments to Canada’s competitiveness as a global hub for mining companies, the Mining Association of Canada said Aug. 30.
The FAD rules were enacted in Bill C-45, the Second Budget Implementation Act, in late 2012. The rules were directed at perceived tax avoidance by foreign-controlled Canadian corporations that acquire or make investments in foreign subsidiaries. The mining industry has been concerned that an erosion of Canada’s unique and world-class junior mining sector would result from unintended consequences of the new legislation. Negative implications were anticipated to extend to Canada’s mining supply sector (the second-largest in the world) and Canada’s mining finance sector (the largest in the world).
The federal Department of Finance released the suggested changes to the FAD rules Aug. 16, and provide for a number of technical adjustments that refine their scope, and in other cases, make their application less burdensome and punitive. While the suggested changes to the rules will continue to restrict the ability of foreign-based multinational corporations to transfer foreign affiliates into their Canadian subsidiaries, they will enable a greater degree of flexibility for affected companies.
“We fully accept that it is important to ensure that cross-border investment is not used as a tool to erode the corporate tax base. At the same time, however, it is important that Canada’s income tax laws continue to be structured to support cross-border investment, the efficient operation of global mining equity capital markets centered in Canada and, in particular, the global junior mining sector that has made Canada its home,” said Pierre Gratton, President and CEO, the Mining Association of Canada.
Toronto is the mining finance capital of the world. From 2008 to 2012, 39 percent of global mining equity capital and more than 70 percent of all global mining equity financing transactions were handled by the Toronto Stock Exchange (TSX) and TSX Venture Exchange. The TSX-Venture is home to over 1,300 junior mining companies, while the TSX lists over 340 major miners - this is more than any other stock exchange in the world.
“While the industry will continue to monitor the effects of the FAD rules, and continue to work with the department to improve them, these suggested changes constitute a welcome and positive development for Canada’s juniors,” said Ross Gallinger, executive director of the Prospectors & Developers Association of Canada. “Mining is an industry where Canada currently leads on the world stage, and we need to ensure the sector has the economic and regulatory support it needs to continue to thrive.”
The suggested changes to the legislation would, among other things:
• Reduce impediments to corporate acquisitions and project funding by limiting the application of the rules where a corporation resident in Canada makes an investment in a foreign affiliate before that CRIC becomes controlled by a non-resident corporation, or after the non-resident corporation gives up control - for example, as part of a public offering of equity.
• Extend the rule reinstating a CRIC’s paid-up capital, where the CRIC distributes to its non-resident shareholder amounts it has received as interest on or from the repayment or sale of certain debt obligations owed to the CRIC by the foreign affiliate.
• Ease compliance requirements by making the application of the “paid-up capital offset” rule automatic.
• Facilitate certain financing arrangements by amending the computation of the CRIC’s debt for the purpose of determining the CRIC’s debt-to-equity ratio under the thin capitalization rules, allowing the CRIC to borrow from a non-resident parent in order to on-lend to a foreign affiliate.
