Michael Shields, "Taxation of International Shipping Companies in Canada", International Tax (Wolters Kluwer CCH), No. 88, June 2016, p. 1

Summaries

General non-imposition is substantially similar relief (p.2)

The country in which the foreign company is resident must provide "substantially similar relief" from tax for a resident of Canada. The CRA has stated that they consider a country that does not impose an income tax as providing substantially similar relief. [fn 11: …July 1991-20.]

Quaere whether exemption excludes return-filing obligation (p. 4)

Although it is clear that foreign companies who carry on international shipping operations and receive assistance from Canadian-based employees are not taxed in Canada on their income, it is not clear whether these companies could be viewed as carrying on business in Canada and as a result, required to file a nil Canadian tax return. [fn 20: The Branch Exemption found in paragraph 81(l)(c) only provides that the international shipping income earned by the foreign taxpayer is not subject to Canadian income tax – it does not provide that the company is not carrying on business in Canada….]… For a large international shipping company with significant employees in Canada, this result could mean filing hundreds of nil returns...each year.

Great Lakes exclusion (p. 3)

Transportation of goods or passengers on the Great Lakes or St. Lawrence River may not qualify as international shipping. For example, transporting goods from a Canadian port along the Great Lakes to a U5 port along the Great Lakes will not qualify; however, transporting goods from a US port along the Great Lakes to another US port along the Great Lakes would generally qualify. [fn 13: However, note that US-to US voyages would normally be subject to US taxation.]

Assimilation of connected income (p. 4)

[G]ross revenue from international shipping can only be earned from activities associated with vessels that are owned within the related group; however, once this hurdle has been passed, virtually all revenue connected with these vessels should qualify as international shipping. For example, revenue earned from employees that provide strategic, operational or administrative assistance to companies within the group that earn international shipping income should qualify as gross revenue from international shipping.

As well, dividend income and interest income from entities that carry out international shipping operations should qualify as long as the company owns an eligible interest…

Potential application of corporate emigration rules where initial inactivity (p. 4)

For a foreign company to be deemed to be resident outside of Canada, all or substantially all of the company's revenues must be from international shipping or dividends and/or interest from certain eligible entities. [f.n. … 250(6)(b)] In years that the company does not receive any gross revenues, it is unclear whether this test can be met. For example,

(a) It is not uncommon for shipping companies to hold each vessel in a separate company and to contract with third-parties to construct these vessels with the construction period lasting two or more years. During that time, the company may earn no income or may earn a very small amount of non-qualifying income…

[A] holding company to hold shares in certain vessel operating companies…may not receive any dividends from its underlying subsidiaries resulting in the company having no gross income during the year.

[I]n a subsequent year when the company did earn income that qualified it to be treated as a non-resident of Canada under the Residency Exemption, the company would be treated as if it migrated from Canada and as a result, would pay tax on the accrued gains…