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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Do recent changes to the Barbados Exempt Insurance Act enable a captive insurance company, which is a foreign affiliate of a corporation resident in Canada, to be considered, in the context of proposed Income Tax Regulations 5907(11)-(11.2) to be resident in Barbados for purposes of the Canada-Barbados Income Tax Agreement?
Position:
No
Reasons:
In substance, a captive insurance company remains exempt from tax and is not subject to full tax liability in the Barbados. The amendments, which are aimed directly at foreign affiliates of Canadian corporations, are essentially an attempt to disguise an annual license fee as an income tax in order to allow captive insurance companies to treat their income as exempt surplus.
960067
XXXXXXXXXX David R. Senécal
Attention: XXXXXXXXXX
March 18, 1996
Dear Sirs:
Re: Barbados Offshore Captive Insurance Companies
This is in reply to your letter of December 15, 1995, wherein you request our views as to whether a foreign affiliate of a corporation resident in Canada, and which is incorporated in the Barbados and licensed under the Exempt Insurance Act, 1983 (the "EIA"), will be considered, in the context of proposed Income Tax Regulations 5907(11)-(11.2), to be resident in Barbados for purposes of the Canada-Barbados Income Tax Agreement (the "Agreement").
We wish to point out that the copy of the EIA legislation which you enclosed with your letter does not reflect the amendments which were recently enacted pursuant to the Exempt Insurance (Amendment) Act, 1995. Our understanding of the EIA as now amended is as follows:
-The EIA, which was enacted in 1983, governs both the operations in Barbados of companies insuring risks outside of Barbados in respect of which premiums originate outside Barbados ("exempt insurance companies" and the operations of companies that manage exempt insurance companies ("management companies").
-An exempt insurance company must be incorporated in Barbados and apply for a license under the EIA. No license is required for a management company but the company must be registered with the Supervisor of Insurance.
-Prior to the recent amendments there was a total and automatic exemption from Barbados taxation for both types of companies and an exempt insurance company was entitled to apply to the Minister of Finance of Barbados for a guarantee of the exemptions and privileges granted under the EIA for a period of up to 15 years. The annual registration or license fee was Bds. $5,000.
-Pursuant to the EIA, as amended, every licensee is now deemed to be managed and controlled in the Barbados and therefore resident in Barbados for tax purposes.
-Licensees will, in future, be taxed at zero percent during the first 15 years of the guarantee period and thereafter at two percent on the first Bds. $250,000 of taxable income with a rate of zero percent applying to taxable income in excess of $250,000 (i.e., maximum of Bds. $5,000). The annual license fee of Bds. $5,000 will not be payable in a year when a licensee is required to pay the two percent tax.
-The guarantee of benefits provided to the licensee and referred to above has been extended from 15 to 30 years and the guarantee is no longer at ministerial discretion but is now an entitlement.
In our view, given the purpose of income tax treaties in general and our understanding, in particular, of the intentions of the parties when negotiating the Agreement, it is our position that an exempt insurance company licensed under the EIA would not be a resident of Barbados pursuant to paragraph 1 Article IV of the Agreement. Therefore, on the basis of Regulation 5907(11.2) as currently proposed, an exempt insurance company will be deemed, for the purposes of Part LIX of the Income Tax Regulations, not to be resident in a country with which Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income.
In substance, the new requirement that, after 15 years, an exempt insurance company pay an income tax of two percent on the first Bds. $250,000 of its taxable income represents, for all intents and purposes, nothing more than a continuing obligation to pay the annual license fee of Bds. $5,000.
Given the reality that an exempt insurance company's main and, most likely, only source of income is effectively exempt from taxation in Barbados (i.e. zero percent) for a guaranteed period of 30 years (leaving aside what is essentially an annual license fee), it is our view that an exempt insurance company is not "liable to taxation" in Barbados, in the sense to be given to those words in paragraph 1 of Article IV of the Agreement, namely, that of full liability to tax, being the most comprehensive form of taxation of a person under the law of Barbados.
We trust that our comments will be of assistance.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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