19 October 2010 Internal T.I. 2007-0261551I7 - Barbados Exempt Insurance Companies (EICs)

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: (1) Is a Barbados-incorporated EIC "liable to tax" within the meaning of Article IV of the Canada-Barbados tax treaty? (2) Is a Barbados-incorporated EIC eligible for benefits under the Canada-Barbados tax treaty? (3) Is a Barbados-incorporated EIC that is a foreign affiliate of a Canadian corporation eligible for exempt surplus treatment under Part LIX of the Income Tax Regulations?

Position: Assuming that an EIC is managed and controlled in Barbados and not a resident of convenience, our general answers are as follows: (1) Yes; (2) No; (3) Yes

Reasons: See below

		October 19, 2010

	Josée Allard							HEADQUARTERS
	Appeals Officer						Income Tax Rulings
	Montreal Tax Services Office					  Directorate
	305 René-Lévesque Blvd. West, 3rd Floor			Sanjeev Sivarulrasa
	Montreal, Quebec  H2Z 1A6 					(613) 957-2104

		2007-026155

Re: Barbados Exempt Insurance Companies

This is in response to your letter dated December 3, 2007 in which you requested our views with respect to a company incorporated in Barbados and licensed under the Barbados Exempt Insurance Act ("BEIA") - commonly referred to as an exempt insurance company or EIC. In particular, you asked whether our views regarding an EIC, as stated in Technical Interpretation 9600675 dated March 18, 1996, had changed in light of Income Tax Technical News No. 35 ("ITTN #35") dated February 26, 2007.

In Technical Interpretation 9600675, we took the position that a Barbados-incorporated EIC was not "liable to taxation" in Barbados within the meaning of Article IV of the Canada-Barbados Tax Agreement ("the Treaty").

In ITTN #35, we made the following comments on the meaning of "liable to tax" under our tax treaties:

It remains CRA's position that, to be considered "liable to tax" for the purposes of the residence article of Canada's tax treaties, a person must generally be subject to the most comprehensive form of taxation as exists in the relevant country. This, however, does not necessarily mean that a person must pay tax to a particular jurisdiction. There may be situations where a person's worldwide income is subject to a 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. In these cases, the CRA will generally accept that the person is a resident of the other Contracting State unless the arrangement is abusive (e.g. treaty shopping where the person is in fact only a "resident of convenience"). Such could be the case, for example, where a person is placed within the taxing jurisdiction of a Contracting State in order to gain treaty benefits in a manner that does not create any material economic nexus to that State.

As confirmed by the Supreme Court in The Queen v. Crown Forest Industries Ltd et al (95 DTC 5389), reviewing the intention of the parties of a tax treaty is a very important element in delineating the scope of the application of the treaty. Accordingly, the determination of residency for the purposes of a tax treaty remains a question of fact, and each case will be decided on its own facts with an eye to the intention of the parties of the particular convention and the purpose of international tax treaties.

Our comments below are premised on the following understanding of the relevant Barbados legislation:

• In general, under the Barbados Income Tax Act ("BITA"), residents of Barbados are taxable on their worldwide income, and non-residents are taxable on their Barbados-source income.
• Residence is not defined under the BITA. Barbados' legal system is derived from English common law. Thus the common law test of "central management and control" (as articulated in De Beers Consolidated Mines Limited v Howe, [1906] AC 455 (HL)), applies for determining whether a corporation is resident in Barbados for the purposes of the BITA.
• Corporations resident in Barbados are taxable on their worldwide income under the BITA. However, the BITA exempts from tax persons that are exempted from paying income tax under any other enactment of Barbados.
• Both Barbados-incorporated and foreign-incorporated companies can obtain a licence to carry on an "exempt insurance business" under the BEIA - our understanding is that these licensees are referred to as exempt insurance companies or EICs. The BEIA exempts an EIC from taxation under the BITA, and instead subjects it to a tax, as described below, on its taxable income after its first 15 years as a licensee.
• The BEIA defines an exempt insurance business as the business of insuring risks located outside Barbados in respect of which premiums originate outside Barbados.
• In the case of Barbados-incorporated EICs, a licence may be issued only to companies incorporated under the Barbados Companies Act and only if the company's objects and activities are the transaction of exempt insurance business.
• The BEIA provides an additional set of rules for determining residence for the purposes of that Act. It provides a statutory rule, similar to the common law test, that a Barbados-incorporated EIC whose shares are beneficially held by persons resident outside Barbados is resident in Barbados if it is managed and controlled in Barbados. The BEIA also deems every Barbados-incorporated licensee to be managed and controlled in Barbados, whether or not it is actually managed and controlled in Barbados.
• The BEIA exempts EICs from taxation under the BITA. The BEIA provides that the only tax to be paid by an EIC is (amounts are in Barbadian currency):
  • For the first 15 financial years of a licensee, including the year in which its licence was issued, income tax at the rate of 0% on the profits and gains of the licensee derived from an exempt insurance business conducted in Barbados; and
  • After the first 15 years, income tax at the rate of 2% of the first $250,000 of taxable income, and at the rate of 0% in respect of all other taxable income in excess of $250,000 (thus the maximum tax payable is $5,000 per year).
• EICs are also charged an annual licence fee of $5,000, but this fee does not apply if the income tax at the rate of 2% applies (i.e. after the first 15 years). Thus the maximum amount payable by an EIC as a fee or tax in any given year is $5,000.
• The BEIA provides a statutory guarantee that the benefits and exemptions provided under that Act will apply to a licensee for a period of 30 years.

Our Comments

Assuming our understanding of the relevant Barbados law is correct, our views are as follows:

(1) Is a Barbados-incorporated EIC "liable to tax" within the meaning of Article IV of the Treaty?

Paragraph IV(1) of the Treaty provides as follows:

For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. The terms "resident of Canada" and "resident of Barbados" shall be construed accordingly.

In our view, paragraph IV(1) when read in light of ITTN #35, requires the following conditions to be met in order for a person to be considered "liable to taxation" in a Contracting State:

1. The State asserts jurisdiction to tax the person under its domestic law;

2. The assertion of jurisdiction is based on one of the connecting factors referenced in Article IV (i.e., "domicile, residence, place of management or any other criterion of a similar nature"); and

3. By reason of conditions 1 and 2 being met, the person becomes liable to the most comprehensive form of taxation that exists in the State (i.e., brought within its most comprehensive tax base pursuant to the domestic law of the State).

In applying conditions 1 to 3 above, the intention of the treaty drafters must be taken into account - in general, the treaty drafters will be understood not to have intended to include in the residence article an entity that is simply a "resident of convenience". As stated in ITTN #35, the determination of residence under a tax treaty remains a question of fact.

In our view, an EIC that is managed and controlled in Barbados is liable to taxation in Barbados within the meaning of Article IV(1) of the Treaty notwithstanding that it is eligible for a time-limited exemption from actual taxation. (footnote 1) This is because an EIC that is managed and controlled in Barbados is resident in Barbados for BITA purposes, and hence taxable on its worldwide income but for the exemption under BEIA. In this respect, we are satisfied, based on our understanding of the Barbados legislation, that Barbados asserts its jurisdiction to tax EICs that are managed and controlled in Barbados based on criteria set out in Article IV(1) of the Treaty. The fact that Barbados may impose only a low rate of taxation or provide an exemption from taxation in the manner set out in the BEIA does not affect our conclusions in this regard. Therefore, subject to our comments in ITTN #35 regarding residents of convenience, it is our view that an EIC that is managed and controlled in Barbados would be liable to taxation in Barbados within the meaning of Article IV of the Treaty.

It is worth noting that this view does not apply to an EIC that is considered resident in Barbados solely because of the rule under the BEIA that deems every Barbados-incorporated licensee under the BEIA to be managed and controlled in Barbados. This deeming rule applies for the purposes of the BEIA, therefore, it does not appear to have any implications under the BITA (i.e., it does not result in the EIC being resident in Barbados for BITA purposes). In our view, this deeming rule creates only an artificial nexus between an EIC and Barbados. Thus only those EICs that are actually managed and controlled in Barbados may be considered to be "liable to taxation" within the meaning of Article IV of the Treaty.

We note that our views above in respect of a Barbados EIC that is managed and controlled in Barbados are consistent with Technical Interpretation 2005-0149771E5, wherein we opined that a Barbados qualifying insurance company ("QIC") that is registered under the Barbados Insurance Act ("the BIA") and managed and controlled in Barbados is liable to tax in Barbados within the meaning of Article IV of the Treaty. Like an EIC that is managed and controlled in Barbados, the QIC is considered resident in Barbados for BITA purposes and, by reason thereof, is subject to the most comprehensive taxation imposed by Barbados (albeit at low effective tax rates).

(2) Is a Barbados-incorporated EIC eligible for benefits under the Canada-Barbados tax treaty?

To be eligible for benefits under the Treaty, an EIC must be liable to taxation in Barbados based on one of the criteria set out in Article IV of the Treaty and it must not be a company described in Article XXX(3) of the Treaty. Article XXX(3) states:

This Agreement shall not apply to companies entitled to any special tax benefit under the Barbados International Business Companies (Exemption from Income Tax) Act, Cap 77 or to companies entitled to any special tax benefit under any similar law enacted by Barbados in addition to or in place of that law.

In our view, the Barbados legislation governing EICs is similar to the Barbados legislation governing international business companies. As a result, it is our view that an EIC is a company described in Article XXX(3) and the Treaty would not apply to it.

(3) Is a Barbados-incorporated EIC that is a foreign affiliate of a Canadian corporation entitled to exempt surplus treatment under Part LIX of the Income Tax Regulations?

To qualify for exempt surplus treatment, a foreign affiliate must be "resident in a designated treaty country". For the purpose of determining whether an affiliate is resident in a designated treaty country it is necessary to determine where the affiliate is resident applying Canadian tax principles. This means that a Barbados-incorporated EIC must be considered, under Canadian law, to be resident in Barbados in order to qualify for exempt surplus treatment under Canada's Income Tax Act. In this respect, the rule under the BEIA that deems every Barbados-incorporated licensee to be managed and controlled in Barbados would not result in an EIC being resident in Barbados for purposes of the Part LIX of the regulations - what matters is the application of the Canadian common law test for residency (similar to Barbados' common law test), as articulated in De Beers Consolidated Mines Limited v Howe, [1906] AC 455 (HL), which considers a company to be resident in the jurisdiction where its central management and control is in fact located.

A second requirement to qualify for exempt surplus treatment under Part LIX of the Income Tax Regulations is that the foreign affiliate must not be deemed, by subsection 5907(11.2) of the Regulations, not to be resident in a treaty country. A foreign affiliate is deemed by this subsection not to be resident in a treaty country, at any time, unless it can meet one of the conditions stipulated under paragraphs 5907(11.2)(a), (b), (c) or (d). These conditions are:

(a) the affiliate is, at that time, a resident of that country for the purpose of the treaty;

(b) the affiliate would, at that time, be a resident of that country for the purpose of the treaty if the affiliate were treated, for the purpose of income taxation in that country, as a body corporate;

(c) where the treaty entered into force before 1995, the affiliate would, at that time, be a resident of that country for the purpose of the treaty but for a provision in the treaty that has not been amended after 1994 and that provides that the treaty does not apply to the affiliate; or

(d) the affiliate would, at that time, be a resident of that country, as provided by paragraph (a), (b) or (c) if the treaty had entered into force.

Paragraphs (b) and (d) above are not relevant in this case. Paragraph (a) is not satisfied because an EIC is described under Article XXX(3) of the Treaty, meaning that an EIC is not a resident of Barbados for the purposes of the Treaty even if it is "liable to taxation" in Barbados under Article IV of the Treaty. However, where an EIC is "liable to taxation" in Barbados under Article IV of the Treaty, it is our view that the EIC would meet the requirements of paragraph (c) above such that the EIC would not be deemed not to be resident in a treaty country by subsection 5907(11.2) of the Income Tax Regulations. In summary, only those EICs that actually have their central management and control in Barbados - i.e. under the Canadian common law test of residency - will qualify for exempt surplus treatment under Part LIX of the Income Tax Regulations.

In light of the foregoing, which is based on our views stated in ITTN #35 dated February 26, 2007, we no longer consider the views stated in Technical Interpretation E9600675 dated March 18, 1996 to be applicable in determining the residence status of a Barbados EIC.

Relief to be provided

If a dividend was received before February 26, 2007 by a Canadian corporation from an EIC that is a foreign affiliate of the corporation and the dividend was assessed as being paid out of the taxable surplus of the affiliate, and there is a valid objection or appeal outstanding regarding the treatment of the dividend, the CRA will resolve the objection or appeal by reference to the views outlined in this letter.

If a dividend was received on or after February 26, 2007 by a Canadian corporation from an EIC that is a foreign affiliate of the corporation and the dividend was reported or assessed as being paid out of the taxable surplus of the affiliate, the corporation will be permitted to amend the return for the relevant taxation year provided that the amendment to the return is requested within the time period in which an assessment or reassessment for the year can be made.

We trust that these comments are of assistance.

Sincerely,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 We note that an EIC is not fiscally transparent for Barbados tax purposes. An entity that is fiscally transparent for tax purposes under the domestic law of a contracting state would not normally be considered "liable to taxation" in that state because the state does not assert its jurisdiction to tax the entity under its domestic law.