The following will be published by Carswell in newsletter Privately Held Companies & Taxes and is reproduced here with permission. I thought it would be of interest to readers expanding operations into the Caribbean.
On November 8, 2011 the protocol to Barbados – Canada Income Tax Treaty was signed but has not been ratified by Canada as yet. It is expected to be ratified this year. The protocol now specifically addresses the IBC entity which was previously carved out of the treaty. The Barbados – Canada Income Tax Treaty (“Treaty”) came into force in 1980. The fact that the Treaty was so old meant that an IBC had to rely on the provisions of Regulation 5907(11.2) (c) of the Canadian Income Tax Act (“ITA”) in order to qualify as a foreign affiliate. (Regulation 5907(11.2)(c) provides that where a foreign entity has been carved out of a treaty signed prior to 1994 and where such treaty has not been amended since but where such foreign entity would qualify as a resident under the treaty in force then such foreign entity is accorded foreign affiliate status for the purposes of the ITA. The IBC has always been an attractive entity for tax planning as it is subject to a maximum tax rate in Barbados of 2.5%. Furthermore no withholding tax is levied on dividends and interest payments made by an IBC to another IBC or to a non-resident of Barbados.
The protocol now extends treaty benefits to the IBC but it should be noted that not all the provisions of the treaty apply to an IBC. Specifically, Articles VI to XXIV do not apply to IBCs. Consequently, an IBC will not be able to benefit from the preferred treaty rates applied to payments in the form of dividends, royalties or interest derived from Canada and will be subject to a 25% withholding tax under the ITA. The Protocol amends the residency determination provision (“the tie-breaker test”) to provide that where a company is deemed to be a resident of both Canada and Barbados, it will be deemed a resident of the country of which it is a national. This amendment will greatly reduce the difficulty of determining residency of an IBC for the purposes of Treaty. Article IV of the 1980 Treaty refers to place of management as a criterion in determining residency of a corporation. Garron (2012 SCC 14 (CanLII) however provides an illustration of the difficulty in determining place of management.
The IBC provides a valuable gateway for Canadian business to access the Caricom markets. Caricom is a free trade zone for countries in the Caribbean. The Caricom now consists of 15 member countries including countries such as Suriname and Jamaica where Canadian companies are carrying out active mining activities. An IBC structured correctly to meet the foreign affiliate definition of the ITA and the active business requirement will be able to distribute from its exempt surplus, consisting of active business income earned in certain Caricom countries, dividends that will be received free from Canadian Income Tax by its Canadian corporate shareholders. Under the Jamaica – Canada Income Tax Treaty, dividends paid from a Jamaican foreign affiliate to its Canadian corporate shareholder are subject to a Jamaican withholding tax rate of 22.5%. Dividends paid from a Jamaican subsidiary to its Barbados shareholder is not subject to a Jamaican withholding tax under the Caricom double taxation agreement (“the Caricom Agreement”). As the Caricom Agreement does not contain a limitation on benefits (“LOB”) clause, there are no barriers to utilising an IBC that is compliant with the foreign affiliate provisions of the ITA and the residency requirement of the Treaty for structuring investments into Caricom taking advantage of Barbados’s position as a signatory to the Caricom Agreement Similar planning opportunities are also available under Barbados’s wide treaty network where the LOB clause is not present.
Ben Arrindell – International Tax Advisor, Bridgetown, Barbados.
Ben is an international tax consultant based in Barbados. He is an advisor to the government of Barbados on international matters. He has been a member of the Barbados government’s double taxation and bilateral investment protection treaty negotiation team since 1995 and has been a member of the United Nations Group of Experts on International Cooperation in Tax Managers for the past six years. He is a former managing partner and international tax partner with Ernst & Young Barbados.
Sunita Doobay TaxChambers Toronto
Sunita Doobay’s tax law practice covers the full range of income taxation and income tax related matters with a primary focus on corporate tax. With a tax law background that spans over 20 years, she has provided tax advice on domestic and international tax issues to public and privately held companies.