TORONTO (miningweekly.com) – The Canadian mining industry views proposed amendments to the foreign affiliate dumping (FAD) rules that the Department of Finance released in August, as a positive step towards reducing significant impediments to the country’s competitiveness as a global hub for mining companies.

The FAD rules were enacted in late 2012 through Bill C-45, the Second Budget Implementation Act, and the rules were intended as a counter measure to perceived tax avoidance by foreign-controlled Canadian corporations that acquired or made investments in foreign subsidiaries.

However, the mining industry had been concerned that an erosion of Canada's unique and world-class junior mining sector would result from unintended consequences of the new legislation, the Mining Association of Canada (MAC) said in a statement last week.

The negative implications were expected 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 MAC said Finance Canada's proposals would help rectify competitiveness concerns arising from the FAD tax rules on Canada's junior mining industry.

The finance department’s suggested changes to the FAD rules were released on August 16, and provided for a number of technical adjustments that refined their scope, and in other cases, made their application less burdensome and punitive.

While the suggested changes to the rules would continue to restrict the ability of foreign-based multinational corporations to transfer, or dump, foreign affiliates into their Canadian subsidiaries, they would 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 centred in Canada and, in particular, the global junior mining sector that has made Canada its home," MAC president and CEO Pierre Gratton said.

Toronto is the mining finance capital of the world. From 2008 to 2012, the TSX and TSX-V handled 39% of global mining equity capital and more than 70% of all global mining equity financing transactions. The TSX-V is home to more than 1 300 junior mining companies, while the TSX lists over 340 major miners – which 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. 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,” Prospectors & Developers Association of Canada executive director Ross Gallinger said.

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 (CRIC) makes an investment in a foreign affiliate before that CRIC becomes controlled by a nonresident corporation, or after the nonresident corporation gives up control – for example, as part of a public offering of equity.

Changes would also extend the rule reinstating a CRIC's paid-up capital, where the CRIC distributes to its nonresident 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.

Further, the suggested changes would ease compliance requirements by making the application of the "paid-up capital offset" rule automatic and, 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 capitalisation rules, allowing the CRIC to borrow from a nonresident parent in order to on-lend to a foreign affiliate.