Income Tax Treaty between Canada and Hong Kong Special Administrative Region of the People’s Republic of China

This article was first published in the December, 2012 edition of Carswell TaxnetPro's publication Private Companies and Taxes.

On the 11^th of November, 2012, the Government of Canada signed a tax treaty (“Treaty”) with Hong Kong.  The treaty will come into force the first day of January in the calendar year following the calendar year in which the treaty is ratified.  Hong Kong continues to enjoy a high degree of autonomy since its 1997 handover to China. Hong Kong is therefore not covered under the Canada – China tax treaty.  The Treaty as will be seen further in this article has more favorable withholding rates to that of the Canada – China Treaty.    The Treaty is similar to the tax treaties Hong Kong has entered to since 2009.  In 2009 Hong Kong was almost placed on the Grey List by members of the OECD as a jurisdiction that had committed to internationally agreed tax standards but had not implemented such standards.  The standard causing grief to the OECD members was “the exchange of information standard” based on Article 26 of the 2004 OECD Model Tax Treaty.  In order to avoid the possibility of being placed on the grey list which would have led to repercussions from member OECD states, Hong Kong was required to enter into 12 comprehensive income tax treaties so as to be regarded as a fully cooperating tax jurisdiction.  Hong Kong complied and has since 2009 entered into comprehensive tax treaties with more than 22 jurisdictions which include the Netherlands, Switzerland, China and Luxemburg.

All of Hong Kong’s tax treaties are based on the exchange of information standard contained in Article 26 of the 2004 OECD Model Treaty but deviate from Article 26 with the provision that the information exchanged must not be disclosed to any third jurisdiction for any purpose.  The exchange of information is only from the date the treaty is ratified and will not apply retroactively. 

The withholding tax rates in the Treaty are as following:

·        5% for dividends where at least 10% of the shares is held by the parent company;

·        10% for dividends paid in all other cases;

·        10% for interest charged between related parties – nil for interest between unrelated parties;

·        10% for royalty withholding.

However as Hong Kong does not have a withholding tax on dividends and interest, the focus of the rates is a reduction of the 25% rate imposed by the Income Tax Act on payments made from Canada to Hong Kong.  Currently the Canada – China Tax Treaty withholding rate is 10% for interest, dividends and royalties and as such the Hong Kong Treaty would be attractive to a Chinese corporation carrying on operations through a corporation in Canada.  However a careful read of the withholding provisions is mandatory to ensure compliance with the Treaty.

Although the Treaty does not contain a Limitation of Benefits clause the wording of a Limitation on Benefits clause is found in the royalty, interest and dividend articles.  This is seldom seen in treaties negotiated by Canada.  The purpose of a limitation of benefits clause is to ensure that a treaty is not used by an entity from a different jurisdiction that is not party to the treaty.    

For Canadian corporations carrying on business in Hong Kong through a corporation the Treaty will be good news as a Hong Kong corporation will qualify upon ratification of the treaty as a foreign affiliate situated in a designated treaty country.  This would allow dividends returning to Canada from the Hong Corporation’s active surplus to be exempt from tax in Canada. 

Sunita Doobay LL.B., LL.M., TEP, TaxChambers, Toronto

Shareholder Control: Per Fiction or USA?

Recently published in the Canadian Tax Highlights a Canadian Tax Foundation Publication and reproduced with permission here.

A CCPC classification is attractive for a variety of tax reasons, including the preferential small business deduction and the heightened SRED investment tax credit (ITC) of 35 percent (rather than 20 percent). The decision in Bioartificial Gel Technologies Inc. (2012 CCI 120) is of particular significance, because the TCC in Bagtech concluded that a unanimous shareholder agreement (USA) resulted in CCPC classification although on the facts more than 50 percent of the corporation’s shares were held by non-residents. (The TCC in Ekamant Canada Inc. (2009 TCC 408) concluded that there was no USA on the facts in that case.)

Bagtech was incorporated under the CBCA and in 2004 and 2005 claimed the 35-percent SR&ED ITC rate as a CCPC. Non-residents held 62.52 and 70.42 percent respectively of its voting shares, but pursuant to a USA the actual right to elect the majority of the directors was held by Canadian residents.

The concept of control is central to the CCPC definition in section 127. The term control itself is not defined in the Act and thus the courts have been left to wrestle with its meaning. For purposes of a CCPC, control is subdivided into a de jure test (control in law) and a de facto test (control in fact). Whenever the Act refers to a corporation as being controlled “directly or indirectly in any manner whatever”, the de facto test for control is triggered: otherwise the only appropriate test of control is the de jure test. Due to the foreign ownership of Bagtech’s shares, the relevant provision to determine control was paragraph (b) of the CCPC definition in 125(7), which calls for the de jure test for control. 

When determining de jure control under paragraph (b) of the CCPC definition, it is important to note that that paragraph creates an important legal fiction: all the shares held by non-resident persons and public corporations are deemed to be owned by a single fictional person. If that fictional person is found to hold de jure control over the corporation, it does not qualify as a CCPC. In reality, the shareholders whose shares are held by the fictional shareholder may or may not act together to control the corporation, or even have any relationship with one another whatsoever. (See “Control Further Dissected”, Canadian Tax Highlights, April 2006.)

Generally, de jure control is “the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors.” (Buckerfield’s Limited, 64 DTC 5301, [1964] CTC 504). Prior to the SCC decision in Duha Printers (98 DTC 6334, [1998] 3 CTC 303), the factors for determining whether de jure control existed included the corporation’s governing statute and its share register, and any limitation laid out in the constating documents on the majority shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the corporation. 

A USA allows shareholders, by a unanimous agreement, to limit or take away all of the managerial powers of the corporation’s directors and to grant those powers to all or some shareholders (as was the case in Bagtech). A run-of-the-mill shareholders agreement, which is solely contractual in nature, is distinct from a USA, which the SCC in Duha said was “a corporate law hybrid, part contractual and part constitutional in nature.” Significantly, a USA has the power to bind current and future shareholders.  Duha established that a USA should be treated as a constating document of a corporation in determining whether de jure control exists. The SCC said that in order for a majority shareholder to lose de jure control, the USA must not allow that shareholder “to exercise effective control over the affairs and fortunes of the corporation in a way analogous or equivalent to the power to elect the majority of the board of directors.”  

In Bagtech the minister contended that a USA does not apply to paragraph (b) of the CCPC definition in subsection 125(7) for purposes of determining whether de jure control is present: the text and the purpose of that provision would be frustrated if the fiction of control it creates could be watered down by a USA that allocates the powers of directors to a group of shareholders that never includes the fictional shareholder. The TCC in Bagtech disagreed and concluded that that provision’s fictional shareholder is bound by a USA. The TCC reasoned that the CCPC definition is a general provision and the court’s role is to give effect to its legislative intent: the legal fiction of a hypothetical shareholder applies in all situations and thus the fictional shareholder is bound by a USA in the same way that the actual shareholders are bound.

Bagtech crystallizes what was decided in Duha: a USA should be treated as a constating document when determining de jure control and in order to conclude that a non-resident majority shareholder does not have de jure control, the USA must remove that shareholder’s ability to control the corporation in a manner equivalent to the power to elect the majority of the board of directors. In addition Bagtech specifically concludes that a USA applies to a fictional shareholder created under paragraph (b) of the subsection 125(7) CCPC definition. Will the Act be amended in light of Bagtech, as it was following the decision in Silicon Graphics? The policy behind the CCPC definition and related provisions is to afford Canadian residents preferential tax treatment under the Act. Any legislative change, however, will likely await the result of the appeal to the FCA that was filed on May 14, 2012. 

Sunita Doobay

TaxChambers, Toronto

Rajeeve Thakur

Miller Canfield Paddock & Stone LLP, Toronto

Austrian Private Foundation Not a Trust

Recently published in the Canadian Tax Highlights, a Canadian Tax Foundation publication and reproduced with permission here.


The FCA released its decision in Sommerer on July 13, 2012 (2012 FCA 207). The FCA dismissed the Crown's appeal, which challenged the TCC's conclusion (2011 TCC 212) on the application of subsection 75(2) and article XIII(5) of the Canada-Austria treaty.


In 1996, the father of Peter Sommerer (Mr. S), a Canadian resident, established a private foundation in Austria under the Austrian Private Foundations Act and capitalized the foundation with 1 million Austrian schillings of his own money for the benefit of Mr. S and his family. An Austrian private foundation may engage in investment activities that are consistent with its purposes, but it cannot engage in commercial activities; it is generally subject to the same income tax laws as other Austrian corporations but is exempt from Austrian income tax as long as it files an information return disclosing its beneficiaries. (A sale of corporate securities is tax-exempt in Austria if the sale occurs more than one year after acquisition.)


On October 4, 1996, Mr. S sold unconditionally to the foundation 1,770,000 shares of Vienna Systems Corporation for FMV at $1,177,050 and received $117,705 and a promise to pay the balance. In December 1997, the foundation sold 216,666 of the Vienna shares for $4.50 each to three individuals unrelated to the Sommerers, realizing a capital gain, and in December 1998 it sold the remainder to Nokia Corporation for $9.00 each, realizing a further capital gain. In April 1998, Mr. S sold unconditionally to the foundation 57,143 Cambrian Systems Corporation shares for $100,000. The foundation sold the shares to Northern Telecom in December 1998 for $14.97 each plus a further $4.12 per share conditional on certain milestones being met in 1999. That sale also resulted in a capital gain for the foundation.


The Canada-Austria tax treaty is based on the OECD model and provides that a gain from the sale of corporate shares is taxable only in the state where the seller resides: on the facts, the seller was the foundation based in Austria. The CRA sought to classify the foundation as a trust and argued that the trust's gains should be attributed to Mr. S pursuant to subsection 75(2) and thus brought within Canada's taxing jurisdiction. The CRA also argued that the treaty did not apply because Mr. S was a resident of Canada, not Austria.


The CRA failed to convince the TCC that the foundation should be characterized as a trust. The TCC said that the foundation was a corporation that held its property in trust for Mr. S and other beneficiaries. The TCC rejected the CRA's position that subsection 75(2) applied to Mr. S and concluded that that provision was intended to target a trust's settlor, who on the facts was the father, not Mr. S. The TCC said that the treaty overruled Canada's jurisdiction and established Austria as the taxing jurisdiction because both the father as settlor and the foundation/corporation as trustee were Austrian residents. Under the mind-and-management test, the TCC concluded that the corporation was an Austrian resident and that Mr. S did not exercise sufficient control to deem it to be a Canadian resident.


The Crown appealed to the FCA on the grounds that subsection 75(2) applied to Mr. S because (1) the TCC had concluded that the foundation held its property in trust for him and his family and (2) the proceeds from the sale were property substituted for the shares that he sold to the trust. The Crown argued that, for example, the proceeds of sale of the Vienna or Cambrian shares might one day be distributed to Mr. S, and thus he might receive property substituted (as defined in the Act) for the shares he had sold to the foundation. Attribution of the gain to Mr. S meant that the Canada-Austria treaty did not apply because he was a Canadian resident and the treaty protection extended to an Austrian resident only.


Mr. S disagreed with the TCC's conclusion that the foundation held its property in trust, but he chose not to argue the point and instead argued that subsection 75(2) did not apply to him and that the treaty would exempt him in any event. In obiter--the proposition was not the subject of submissions before the FCA--Sharlow J, writing for a unanimous FCA, concluded that it was doubtful that the foundation held its property in trust. She said that the foundation created under Austrian civil law resembled a corporation in Canada rather than a trust and that the rights of a member in a foundation resembled that of a shareholder in Canadian corporation:

Looking at the situation from another point of view, a shareholder or member of a corporation, as such, is not the beneficial owner of any property or the corporation, and has no legal or equitable claim to the corporate property (unless such a claim arises upon the declaration by the board of directors of a dividend, or when the dissolution of the corporation is imminent). Unless and until such an event occurs, a shareholder or member has only an inchoate right to receive distributions of corporate property from time to time at the discretion of the board of directors, and to share in the distribution of the corporate property upon its dissolution. The same can be said of the interest of a beneficiary or an ultimate beneficiary in the property of an Austrian private foundation. Nothing in the Austrian Private Foundations Act or the constating documents of the Sommerer Private Foundation gives Peter Sommerer a legal or equitable claim to the corporate property that is different from that of a shareholder or member of a corporation.

The fact that the father "as a practical matter . . . may well have achieved many of the objectives that could have been achieved in a common law jurisdiction by settling a trust" for Mr. S and his family did not mean that a trust was created at the foundation's establishment or when he sold the shares to it. Mr. S and his family more closely resembled a corporation's shareholders than a trust's beneficiaries with an equitable claim to the trust corpus. A foreign entity such as the foundation should be classified as a trust only if, under common law, a trust has been created. (Under common law, as summarized by the SCC in Air Canada v. M & L Travel Ltd. ([1993] 3 SCR 787), a trust is created only if three certainties exist: the intention to create a trust, the trust's subject matter, and the trust's object or beneficiary.) Sharlow J implicitly reflected the common law on the creation of a trust when she stated that "[a] corporation does not hold its property in trust for its shareholders or members, except to the extent that a trust deed or an analogous legal instrument imposes the legal and equitable obligations of a trustee on the corporation with respect to specific corporate property." She concluded that "[n]othing in the constating documents of the [foundation] or the law of Austria, as reflected in the record of this case, [supported] the conclusion that the right of the [foundation] to deal with its property is constrained by any legal or equitable obligations analogous to those of a common law trustee" or gave Mr. S a legal or equitable claim to the corporate property that was different from the claim of a shareholder or member of a corporation.


Although Sharlow J concluded that it was doubtful that the foundation held any property in trust for Mr. S, in the balance of her reasons she proceeded on the assumption--without deciding--that the father had settled a trust in favour of Mr. S and his family. In her analysis of subsection 75(2), she agreed with the TCC's Miller J that subsection 75(2) could not apply to a beneficiary of a trust who transfers property to a trust by means of a genuine sale and quoted his conclusion: "[O]nce properly unravelled and viewed grammatically and logically, the only interpretation is that only a settlor, or a subsequent contributor who could be seen as a settlor, can be 'the person' for purposes of subsection 75(2) of the Act." Sharlow J said that "to interpret subsection 75(2) so that it could apply to a beneficiary in respect of property that the trust acquired from the beneficiary in a bona fide sale transaction leads to outcomes that are absurd and could not have been intended by Parliament." The facts clearly showed that the foundation had purchased the Vienna shares with funds from the original endowment made by the father, who was not a resident of Canada, and thus subsection 75(2) did not apply.


Although that conclusion was sufficient to dismiss the appeal, Sharlow J commented on the Crown's treaty argument because the TCC had dealt with the issue. The Crown argued that the treaty provided no relief to Mr. S in the event that subsection 75(2) applied because he was not an Austrian resident. The Crown argued that the reservation under article XXXVIII(2), which allows Canada the right to tax residents of Canada on income and gains pursuant to section 91 (the FAPI rules), meant that the domestic attribution rules do not contravene a treaty that is based on the OECD model. If this argument had been successful, it would have created a groundbreaking precedent; but Sharlow J agreed with the TCC that "[t]here is no similar reservation relating to the attribution of income and gains under subsection 75(2), which means that Canada has not reserved the right to tax residents of Canada on income and gains attributed to them under subsection 75(2)." The FCA rejected the Crown's argument that foreign jurisprudence establishes that domestic attribution rules do not conflict with international tax conventions based on the OECD model. Instead, the court agreed with the international tax expert Karl Vogel that one must analyze each treaty and its reservation clauses before concluding that a specific domestic law overrides a treaty.


This is not the first time that the Crown has advanced the position that subsection 75(2) overrides a treaty's capital gains clause. In St. Michael Trust Corp. (sub nom. Garron Family Trust v. The Queen (2009 TCC 450)), the TCC discussed the interaction of subsection 75(2) and the relevant capital gains clause in article XIV(4) of the Canada-Barbados treaty. Woods J concluded that subsection 75(2) did not override that treaty's capital gains article, which was clearly drafted and reflected its object and spirit. She also said that the question to be asked was, "Did the Treaty's contracting states intend to reserve to themselves under Article XIV(4) a residual right to tax gains arising in the other contracting state?" and concluded that it did not: "I would also comment that the Treaty contains a specific override provision in reference to another attribution rule. Article XXX(2) provides an override in reference to the Canadian taxation of [FAPI] earned by non-resident corporations. If the drafters of the Treaty had intended an override for other attribution rules, they could have been specifically provided for it."


The issue of whether subsection 75(2) can override a treaty's capital gains article was first raised and rejected by the TCC in 2009. It was advanced by the minister in 2011 in Sommerer. It appears that the FCA has now settled the issue: subsection 75(2) does not override a treaty's capital gains article unless a clause in the treaty specifically carves out an exception for the application of subsection 75(2).


Sunita Doobay
TaxChambers, Toronto

Canadian Tax HighlightsVolume 20, Number 8, August 2012
©2012, Canadian Tax Foundation

Contemporaneous SR & ED Documentation

Recently published in the Canadian Tax Highlights and reposted here with permission is the following article on the documentation requirement when claiming SR&ED:


The recent decision of the TCC in Murray Arlin Dentistry Professional Corporation v. The Queen (2012 TCC 133) was heard under the informal procedure and thus has no precedential value. Nonetheless, the decision is a reminder of the need to maintain contemporaneous documentation to evidence the fact that research was performed by the SR & ED claimant.

The taxpayer was a professional corporation operating the dental practice of Dr. A, a periodontist who specialized in implants. Dr. A spent at least one day a week studying data produced by specialized software that tracked the success rates of implants and the variables that affected those rates. Woods J accepted that the doctor’s research was a useful addition to scientific knowledge; at issue was whether for the 2007 and 2008 taxation years the doctor could prove that he spent an average of 350 hours per year systematically carrying out that research.

Woods J noted that SR & ED is defined in subsection 248(1) to mean a “systematic investigation or search that is carried out in a field of science or technology.” The TCC’s decision in Northwest Hydraulic Consultants Ltd. (1998 CanLII 553) remains the leading case on the meaning of “systematic investigation.” In that decision, Bowman J said that “[a]lthough the Income Tax Act and the Regulations do not say so explicitly, it seems self-evident that a detailed record of the hypotheses, tests and results be kept, and that it be kept as the work progresses.”


The facts in Murray Arlin show that Dr. A carried out research and that he did so on at least one day each week; but he never documented the hours spent, nor did he provide a hypothesis on what “uncertainty” he was overcoming with the data that he collected. Dr. A was a prolific writer, lecturer, and participant in study clubs. He used about 50 of the possible 200 software variables—such as whether the patient smoked and the type of implant—to track success rates. He had records for about 12,000 implants performed by him (approximately 1,000 surgeries a year). The CRA submitted that Dr. A “failed to develop specific hypotheses prior to the data collection” and that there was insufficient evidence of the time spent by him studying the data. Northwest Hydraulic analyzed the need for technical risk or uncertainty and the need for the claimant to “formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty.” Although Dr. A testified briefly that he updated his research for his lectures, many of the lectures were not given to implant specialists and they had a marketing component. The evidence was far too vague to establish the time spent on analysis or data collection and thus the one-fifth allocation of salary: the software was “designed to present comparative tables at the press of a button. The actual time spent on applied research potentially might be very small.”  Woods J agreed with the minister that without a hypothesis there could be no systematic investigation, but she was reluctant to agree that such a narrow position precluded a finding that there was insufficient evidence of systematic investigation. 

The major obstacle to ruling in the taxpayer’s favour was the lack of documentation: “The main problem that I have with the appellant’s position is that there was very little detailed evidence regarding the analysis done in the years at issue and the time spent.”

Sunita Doobay
TaxChambers, Toronto

Art, Tax Shelters and Life

Art tax shelters bother me and they bother the Canada Revenue Agency  ("CRA") as well.  When I speak of art – I am speaking of visual art which includes prints, paintings and sculptures.  And this is the Art – Art tax shelters tend to focus on.

Art has always held a special place in my heart.  I grew up surrounded by Erwin De Vries’ paintings and sculptures.  Lately I have fallen in love with the works of Charles Pachter and that  of Carl Ray.  

Carl Ray was a contemporary of Norvelle Morriseau and a member of the Woodland Groupof Painters.  The other members of the Woodland group are Jackson Beardy, Eddy Cobiness, Alex Janvier, Daphne Odjig and Joe Sanchez.  The image to the left is a painting by Carl Ray - the copyright to the image belongs to the heirs of his estate.

 

Art tax shelters bother me because it cheapens the inherent value of art – art in a shelter becomes a means to a tax credit instead of a purchase to enjoy.  Art triggers various emotions – Van Gogh’sbales of hay is a beauty to behold and so is Monet’s.  Not sure why I love bales of hay but I do. TheScream by Edvard Munch always raises my anxiety level but not sure if it does the same for the recent purchaser of The Scream who paid $120 million U.S.  And I love Carl Ray`s usage of colours in the attached painting of the Loon and fish swirling around.

An art tax shelter is where you purchase a work of art below fair market value and then donate such work for fair market value to a charitable organization in exchange for a donation receipt thereby allowing you a credit at fair market value.  However how does one determine fair market value – this is rather a subjective test as endless of discussions on the Internet have demonstrated regarding the recent purchase price of The Scream.  The subjectiveness on the determination of fair market value also allows the CRA to challenge the valuation allocated to the work of art in a shelter arrangement.  

 

To the lover of Art - do note Dear Reader that the Canadian Income Tax Act allows a deduction against business income on the purchase of Canadian Art (print, sculpture and paintings).  A taxpayer is allowed to deduct under the capital cost allowance rules (depreciation rules) the cost of the Canadian art over a period of years against business income earned until the full purchase price has been deducted.

Art tax shelters were common but have mostly been shut down especially with the introduction of proposed subsection 248(35) which states that the cost of a gift is determined by the lesser of the amount paid (cost) or the fair market value of the gift.  However a discussion of art tax shelters is relevant though because other shelters have taken their place.  


In a shelter scenario the taxpayer does not win as illustrated in Klotz v.The Queen, 58 DTC 2236; [2004] 2 CTC 2892 even where such taxpayer relied on legal opinions from large law firms and on the opinion of their accountants.  In Klotz the taxpayer participated in an art flip program marketed by AFE Consultants Limited.  The taxpayer purchased prints and donated the prints to charities in return for a donation receipt.  The donation receipts displayed the market value of the prints to be several times more than what the taxpayers paid.  Tax opinions from large lawfirms confirmed that a tax credit could be claimed for the amount displayed on the receipts.  AFE Consultants Limited also paid a commission to accountants and other tax advisors who recommended the purchase of an AFE print to their client. 

The taxpayers in Klotz were audited by Canada Revenue Agency and were disallowed the credit claimed on the receipts.  The Tax Court of Canada and the Federal Court of Appeal agreed with Canada Revenue Agency but did allow the taxpayer a credit for the cost of the Art not the fair market value.  This was bad news for the taxpayer as they were out of pocket for the credit taken against their income which was twice or more than twice the value of the cost of the art.  Also back taxes, penalties plus interest had to be paid.

The reason for writing this post is that often taxpayers who get involved with tax shelters tend to be individuals of high net worth.  It was to my shock on Friday that I had a consultation as a favour to an acquaintance and learned that these donations shelters are not limited to the very well off but also to the lower income taxpayer such as the single mother I met with.  This single mother works shifts starting very early –  she raised her children on a very small income and heard through her tax preparer about how you could donate $4,000 to a religious organization and receive a $40,000 donation receipt in return.  The shelter came with promotional material and looked legit.  So she donated $4,000 – received her credit and continued to do so for the next few years.  Canada Revenue Agency in an audit discovered this shelter and seized the books and records of the promotor which led to the audit of this poor woman.  Her credits against income were denied and she now faces a tax bill of over $120,000 which includes penalties and interest and taxes owing.  It saddened me to see first-hand an unsophisticated taxpayer getting involved in a fraudulent scheme.  Such taxpayers rarely have access to an accountant or a tax advisor to warn them of the mine field of tax shelters.  Of course she should have known better but it is easy to also see her believing the fancy promotional material waved before her face and the lure of a large credit. 

One of the taxpayers (see Lemberg v. Perris, 2010 ONSC 3690 (CanLII)) who took part in the AFE Consultants Limited shelter successfully sued his accountant for recommending the shelter on the basis that the accountant had breached the accountant – client fiduciary duty owed by an accountant to his or her client.  In Lemberg the accountant was paid a commission by AFE Consultants for recommending the purchase of the prints through the AFE shelter.  


However practically speaking law suits are expensive and if bringing a suit against the promoter of the shelter or the advisor recommending the shelter then one must also ensure that the statute of limitation for bringing such an action has not expired.  For a taxpayer caught in the web of tax shelters, recourse against the promotor, advisor can only happen through a class action law suit - it would be too expensive otherwise - for sure the single mother I met could never afford a suit on her own which in essence illustrates the difficulty of access to fairness for the lesser well off.

IBC – A gateway for Canadian Corporations to the Caricom

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.

R&D funding for collaborative Brazil-Canada projects

I am not sure why but when I think of Brazil and research I always think of Alberto Santo Dumont maybe because I adore the watch Cartier made for him and named after him.  For those of us who love watches, we have Alberto Santo Dumont to thank for the popularity of the wristwatch.   No, I am not going to go into the debate of who was the first inventor of the airplane the Wrights brothers or Santo Dumont ... However I do hope that we see many innovative projects resulting from the collaboration between Brazil and Canada  especially now through the new ISTPCanada program.

An often overlooked program for companies seeking bi-lateral research and development is the International Science and TechnologyPartnerships Inc. (“ISTPCanada”) has now launched an R&D collaboration program between Canada and Brazil.  This program is mandated by the Federal Government of Canada through Foreign Affairs and International Trade Canada (DFAIT) and provides an opportunity for a Canadian business to enhance its R&D with counterparts in Brazil.  Canada will provide up to $400,000 to Canadian company qualifying under the program.  It should be noted that this amount need not be repayable at the completion of the project.  If the Canadian entity is a Canadian university then the National Sciences and Engineering Council of Canada (“NSERC”) will award funding directly.  Under the Brazilian program, the Brazilian company will receive funding from the State it is carrying on research.