CRA requires proof that a Barbados remittance-based resident has borne tax on Canadian dividend income before providing the Treaty rate reduction

Dividends sourced from a Canadian corporation and received by a beneficiary of a resident trust (“NR-Beneficiary”) that was resident, but not domiciled, in Barbados and which was deemed to have received the dividends pursuant to a s. 104(19), was considered by CRA to qualify as a Treaty resident (i.e., under the Crown Forest test, it was “subject to the most comprehensive form of taxation” existing in Barbados) even though it was subject to tax on its income from non-Barbados sources only to the extent that such income was remitted to Barbados. CRA stated:

[E]ven if … the taxation of the Trust Income may be deferred until a benefit is obtained in the form of a remittance of money or an importation of property in Barbados, it is our understanding that the NR-Beneficiary remains, nonetheless, “liable to tax” in Barbados in respect of its worldwide income.

Although the dividends thus would otherwise be eligible for a Treaty-reduced rate of 15%, CRA noted that Art. XXX(5) generally permitted the application of the provisions of the Treaty to income received by a remittance basis Barbados taxpayer only if that income was taxed by Barbados in its hands. The Directorate then stated:

If a person who is subject to remittance basis taxation in Barbados files a return of income in Barbados contrary to the application of the law in force in Barbados, it is our view that the income reported on that return (the “Income”) would not be considered “taxed” in Barbados for the purposes of Article XXX(5) such that the benefits of the Treaty would not apply to the Income. Such would be the case if, for example, the Income is erroneously or mistakenly taxed or if taxes are gratuitously paid in respect of the Income in Barbados, without legal basis.

Accordingly, to receive the Treaty-rate reduction on the dividend income, NR-Beneficiary would be required to establish that such income was taxed in Barbados in conformity with Barbados tax law.

Neal Armstrong. Summaries of 5 October 2021 Internal T.I. 2021-0903361I7 under Treaties – Income Tax Conventions – Art. 4, Art. 29.