Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether Article XXX(5) of the Treaty applies to limit the application of the 15% reduced withholding tax rate provided for in Article XXIII of the Treaty to a dividend paid by a Canadian-resident corporation to a Canadian-resident trust, and deemed to have been received, under subsection 104(19), by a Barbados-resident beneficiary of the trust that is subject to tax on a remittance basis in Barbados.
Position: In order for the benefit of the 15% reduced withholding tax rate in Article XXIII of the Treaty to apply to the trust distribution, the non-resident beneficiary of the trust would have to establish, based on supporting relevant documentary evidence, that the dividend has been remitted and taxed in Barbados in conformity with the law in force in Barbados.
Reasons: Previous positions and application of Articles XXIII(3) and XXX(5) of the Treaty.
October 5, 2021
Mr. Denis Robichaud Income Tax Rulings Directorate
Auditor International Division
XXXXXXXXXX Jean-Bernard Dion
Article XXX(5) Canada-Barbados Tax Treaty
This is in response to your request for a technical interpretation dated June 1st, 2021, wherein you requested our views on the application of the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital, signed on January 22, 1980 and amended by Protocol of November 8, 2011 (the “Treaty”).
Unless otherwise stated, all references to an Article or subset thereof are to the equivalent Article or subset thereof of the Treaty, all other statutory references are to the equivalent provision under the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, and all terms and conditions used herein that are defined in the Treaty (e.g.: “resident” as defined in Article IV) have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.
In a situation where a cash dividend and a dividend in kind (the “Dividends”) are paid by a corporation resident in Canada to a personal discretionary trust also resident in Canada and that the Dividends are deemed to be received, under subsection 104(19), by an income beneficiary of the trust (the “NR-Beneficiary”) that is resident, but not domiciled in Barbados under the law in force in Barbados, you asked the following question:
Would the Dividends that are deemed to be received by the NR-Beneficiary under subsection 104(19) (the “Trust Income”) be subject to withholding tax, under paragraph 212(1)(c), at a reduced rate of 15%, by virtue of Article XXIII(3) and Article XXX(5)?
1. The Act
Paragraph 212(1)(c) provides that any amount a person resident in Canada pays or credits to a non-resident person as income from an estate or trust that is included in computing the income of the non-resident person under subsection 104(13) is subject to a withholding tax at a rate of 25%.
Having regard to the situation described above, assuming that the Trust Income is included in computing the income of the NR-Beneficiary under subsection 104(13), we are of the view that the Trust Income should generally be subject to withholding tax under paragraph 212(1)(c) at a rate of 25%, unless reduced by terms of the Treaty.
2. Barbados Income Tax Act
It is our understanding that, under the law in force in Barbados, a person resident, but not domiciled in Barbados, is generally taxed on income derived from sources in Barbados, as well as on income from sources outside Barbados, but in the latter case, only to the extent a benefit is obtained in Barbados from that income in the form, among others, of a remittance of money or an importation of property. This is commonly referred to as “remittance basis taxation”. In particular, section 17 of the Barbados Income Tax Act, 1968, c. 73 (“BITA”) states as follows:
“17. In calculating the assessable income for an income year of a resident person who during the income year is not domiciled in Barbados, the following amounts and no others shall be included, that is to say
(a) income derived from Barbados for that income year;
(b) income from an office in Barbados or employment exercised therein for the income year whether or not the contract of employment was made in Barbados and whether or not the employer is resident in Barbados ;
(c) income from other sources outside Barbados whenever derived to the extent that a benefit is obtained in Barbados from that income in that income year in the form of a remittance of money, an importation of property, the granting of credit by bank overdraft or otherwise or in other form whatever, and no deductions or allowances in respect of the calculation of assessable income shall be made in respect of income or the production of income not so included.” (emphasis added)
Having regard to the situation described above, it is our understanding that the NR-Beneficiary should, under the law in force in Barbados, generally be subject to tax in respect of the Trust Income, but only to the extent a benefit is obtained in Barbados from the Trust Income in the form of a remittance of money or an importation of property.
3. Canada-Barbados Tax Treaty
3.1. Residency Status
In order to qualify for the benefits under the Treaty, a person must be a resident of a contracting state. In particular, Article IV(1)(a) defines the term “resident of a Contracting State” as follows:
“For the purposes of this Agreement, the term “resident of a Contracting State” means:
(a) any person who, under the laws of that State, is liable to tax therein by reason of that person’s domicile, residence, place of management or any other criterion of a similar nature, but does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein; and” [emphasis added]
It has been our long-standing position, as stated in the Income Tax Technical News 35, Treaty Residence – Resident of Convenience, dated February 26, 2007 (“ITTN-35”), that, to be considered “liable to tax” for the purposes of the residence article of Canada’s income tax treaties, a person must be subject to the most comprehensive form of taxation as exists in the relevant contracting state.
In this respect, having regard to the situation described above, assuming that the NR-Beneficiary is subject to tax on a remittance basis in Barbados under the law in force in that contracting state, we are of the view that the NR-Beneficiary should be considered subject to the most comprehensive form of taxation as exists in Barbados and, consequently, “liable to tax” under the laws of Barbados within the meaning of Article IV(1)(a). That is because, even if, under the law in force in Barbados, 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.
It should also be noted that being “liable to tax” does not necessarily mean that a person must pay tax to a contracting state. Indeed, there may be situations where a person's income is subject to a particular contracting state's full taxing jurisdiction, but that state's domestic law does not levy tax on a person's taxable income or taxes it at low rates.
3.2. Article XXIII(3) and Article XXX(5)
By virtue of Article XXIII(3), income from a trust derived from sources within Canada by a resident of Barbados who is subject to Barbados tax is generally subject to a withholding tax at a reduced rate of 15%. However, notwithstanding Article XXIII(3), Article XXX(5) generally restricts the application of the provisions of the Treaty to income that is taxed in the hands of a person subject to tax on a remittance basis in Barbados. More precisely, the current version of Article XXX(5) states as follows:
“5. Where under any provision of this Agreement any income is relieved from tax in a Contracting State and, under the law in force in the other Contracting State a person, in respect of that income, is subject to tax by reference to the amount thereof that is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the relief to be allowed under this Agreement in the first-mentioned Contracting State shall apply only to so much of the income as is taxed in the other Contracting State.”
In the situation described above, assuming that, in respect of the Trust Income, under the law in force in of Barbados, the NR-Beneficiary is subject to tax by reference to the amount of the Trust Income that is remitted to or received in Barbados, we are of the view that the Trust Income should generally be subject to withholding tax under paragraph 212(1)(c) at a reduced rate of 15% by virtue of Articles XXIII(3) and XXX(5), but only to the extent of the portion, if any, of the Trust Income that is taxed in Barbados. The remaining portion of the Trust Income, if any, would be subject to withholding tax under paragraph 212(1)(c) at a rate of 25%.
In order to determine whether an income, in respect of which a person is subject to tax by reference to the amount thereof that is remitted to or received in Barbados, is taxed in Barbados for the purposes of Article XXX(5), we are of the view that it must be determined that the tax is levied in conformity with the law in force in Barbados.
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.
Consequently, in order to obtain the benefit of the 15% Canadian withholding tax rate specified in Article XXIII(3) to any portion of the Trust Income, pursuant to Article XXX(5), the NR-Beneficiary would have to establish, based on supporting relevant documentary evidence, that a portion of the Trust Income is taxed in Barbados in conformity with the law in force in that country. If the NR-Beneficiary is unable to provide such satisfactory evidence, the benefits of Article XXIII(3) to the Trust Income could be denied. This would be the case if, for example, the facts demonstrate that the Trust Income, or a portion thereof, has not been remitted to or imported in Barbados, within the meaning of the above-mentioned section 17 BITA.
If the CRA denied the benefit of Article XXIII(3) and the NR-Beneficiary considered that position as not being consistent with the Treaty, the NR-Beneficiary could make a written request for assistance to the Competent Authority of Barbados presenting the grounds for a revision of such taxation in accordance with the Mutual Agreement Procedure stated in Article XXVII.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We hope that the above comments are helpful to you.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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