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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: (1) Is a Barbados Society with Restricted Liability ("SRL") a corporation for purposes of the Act? (2) Are SRLs entitled to benefits under the Canada-Barbados Tax Agreement (the "Barbados Convention")? (3) Does Article XXVII(3) of the Barbados Convention apply to a transaction between the Canadian taxpayer and a Barbados SRL with whom the taxpayer does not deal at arm's length? (4) Are SRLs resident in a designated treaty country for purposes of Part LIX of the Income Tax Regulations (Canada) (the "ITR")?

Position: (1) Yes. (2) No for an International/Exempt SRL; but yes for a Non-Exempt SRL. (3) No. (4) Yes for both International/Exempt SRLs and Non-Exempt SRLs, assuming that they are resident in Barbados under the Canadian common law principles.

Reasons: (1) It has characteristics that more closely resemble a corporation under Canadian common law. (2) Article XXX(3) of the Barbados Convention applies to an International/Exempt SRL but does not apply to a Non-Exempt SRL. (3) The income arising for Canadian tax purposes to the Canadian taxpayer as a result of the transaction is not charged to tax in Barbados. (4) Assuming that they are resident in Barbados under Canadian common law principles, an International/Exempt SRL would satisfy the condition in paragraph 5907(11.2)(c) of the Income Tax Regulations (the "ITR") and a Non-Exempt SRL would satisfy the condition in paragraph 5907(11.2)(a).

		April 28 , 2003

	XXXXXXXXXX  Tax Services TSO	HEADQUARTERS
	XXXXXXXXXX 	Income Tax Rulings Directorate
	XXXXXXXXXX 	S.Wong
(613) 957-9231
	Attention: XXXXXXXXXX
		2003-000734

XXXXXXXXXX .

Barbados Society with Restricted Liability

We are writing in reply to your memorandum of March 10, 2003 and the documents attached thereto, in which you requested our comments on certain issues relating to the status of a Society with Restricted Liability ("SRL") organized under the Barbados Societies with Restricted Liability Act, 1 L.R.O. 2001, CAP.318B (the "SRL Act") for purposes of the Income Tax Act (Canada) (the "Act") and the Canada-Barbados Tax Agreement (the "Barbados Convention"), in the following situation.

Background Information

1. XXXXXXXXXX.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

5. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. Our comments below are based on the following background information on the characteristics of SRLs, the Barbados tax treatment of SRLs and certain other aspects of the Barbados tax system, which are generally based on our review of the SRL Act, the Barbados Societies with Restricted Liability Regulations, 1995, 1 L.R.O. 1998, CAP.318B (the "SRL Regulations") and the Barbados International Business Companies Act, 3 L.R.O. 2001, CAP.77 (the "IBC Act") (which are available from the Barbados Ministry of Economic Development website), as well as our general understanding of the Barbados tax system.

(a) The SRL Act provides "for the organisation of societies with restricted liability with full corporate personality and for related matters" (preamble of the SRL Act). The purpose of the SRL Act is to provide the societies with full corporate personality (subsection 3(1) of the SRL Act). Subject to certain restrictions, one person or more may organise a SRL by signing and sending articles of organisation to the Registrar of Corporate Affairs and Intellectual Property (the "Registrar") together with the prescribed fee (section 5 of the SRL Act).

(b) Pursuant to section 40 of the SRL Act, a SRL organised under the SRL Act that complies with certain requirements (described below) may apply to the Minister in the form prescribed for a licence to function as an international society with restricted liability. We understand that such an international society was previously known as an exempt society and is referred to herein as an "International/Exempt SRL". A SRL that is not an "International/Exempt SRL") is referred to herein as a "Non-Exempt SRL". References herein to SRLs are references to both Non-Exempt SRLs and International/Exempt SRLs and a reference to a SRL is reference to either a Non-Exempt SRLs or an International/Exempt SRLs.

(c) The following are some of the characteristics of a SRL (whether a Non-Exempt SRL or an International/Exempt SRL):

(i) The duration of a SRL may not exceed 50 years (paragraph 6(1)(c) of the SRL Act).

(ii) A SRL has the capacity and the rights, powers and privileges of an individual (subsection 13(1) of the SRL Act). The SRL Act (sections 56 and 57) refers to a SRL as a body corporate.

(iii) The capital in a SRL is known as "quotas", the quotas are personal property and are transferable in the manner provided in the by-laws of the SRL (section 14 of the SRL Act).

(iv) A SRL must have at least two members (section 19 of the SRL Act).

(v) A member may transfer his quotas as provided in the by-laws, but the transferee does not become a member unless all of the other members of the SRL unanimously consent to the transfer (subsection 14(5) of the SRL Act).

(vi) A SRL shall maintain articles, by-laws and amendments, minutes of meetings and resolutions of the members as well as a register of the members (section 24 of the SRL Act).

(vii) A SRL is dissolved upon the death, retirement, resignation...of a member unless the articles or by-laws provide otherwise (section 30 of the SRL Act).

(viii) To the extent that they are not inconsistent with the SRL Act or the SRL Regulations, the Barbados Companies Act and its Regulations will apply to an SRL (sections 64 and 65 of the SRL Act). Although the SRL Act does not provide specifically that a member of a SRL has limited liability, the Barbados Companies Act provides that the shareholders of a company are not, as shareholders, liable for any liability, act or default of the company except under certain provisions. It appears that this limited liability provision applies to members of a SRL because of section 65 of the SRL Act.

(d) The SRL Act was originally enacted in July of 1995. At the time the legislation was proposed, it was stated that the legislation is "similar to its counterpart in civil law (societé à responsabilite limitee (S.A.R.L.)) in French, (sociedad de responsibilidad limitada (S de S.L.)) Spanish, or (Gesellschaft mit besch,,nkter Haftung (GmbH)) German legal systems. The draft law also have elements of the limited liability company laws in the U.S. Some authors state that the SRL legislation was enacted to mimic the U.S. LLC. Although there appears to be some amendments to the SRL Act since it was originally enacted, it does not appear that these amendments has substantively changed any of the characteristics of a SRL set out above or the general tax treatment of SRLs.

(e) As discussed above, a SRL may apply for a licence to function as an International/Exempt SRL provided that it complies with the following restrictions. Subject to certain exceptions, an International/Exempt SRL may not:

(i) acquire or hold land in Barbados, other than land required for its business held by way of lease or a tenancy agreement for a term not exceeding the period fixed in the articles for the duration of the society or such shorter period as circumstances require;

(ii) transact business with any person resident in Barbados;

(iii) take deposits from any person in contravention of the Financial Institutions Act.

The exceptions to these restrictions are that an International/Exempt SRL may: (1) acquire such goods and services in Barbados as it requires for the conduct of its business; (2) transact in Barbados such business as may be prescribed with another International/Exempt SRL, an international business company ("IBC") licensed under the IBC Act, an off-shore bank licensed under the Off-shore Banking Act, and an exempt insurance company licensed under the Exempt Insurance Act; and (3) effect and conclude contracts or arrangements with persons in Barbados for the supply of goods and services to the society that are necessary for the purpose of enabling the society to carry on its business with persons outside the Caricom region.

(f) A licence for an International/Exempt SRL remains in force until the 31st December of the year in which it was issued, and may be renewed before the 1st day of January in each year on payment of the prescribed fee. However, the Minister may cancel or refuse to renew a licence where the society engages in any business prohibited by the SRL Act, fails to comply with a condition of its licence or any requirement of the SRL Act or on grounds of public policy.

(g) Some of the key elements of the Barbados tax system as they relate to the matters at issue in this memorandum are as follows:

(i) "Resident" companies are subject to tax (at 40%) under the Barbados Income Tax Act (the "BITA") on worldwide income (section 3 of the BITA charges tax on every person that has taxable income; section 16 then limits assessable income for persons who are not resident in Barbados, or resident but not domiciled in Barbados).

(ii) Residence of corporations is based on location of mind and management, not place of incorporation.

(iii) The SRL Act overrides the BITA with respect to tax treatment of International/Exempt SRLs. Section 44 of the SRL Act provides that an International/Exempt SRL "shall not be liable to pay any tax under the Income Tax Act, except as is provided by section 43 in respect of an income year, nor shall it be liable under this or any other enactment to pay any other direct tax on its profits and gains in respect of that income year". Subsection 43(1) of the SRL Act limits the tax rate on various ranges of income of an International/Exempt SRL, in lieu of the rate specified in the BITA, as follows:

"(1) Subject to this section and section 44, in lieu of tax at the rate specified under the Income Tax Act, there shall be levied and paid to the Commissioner of Inland Revenue in respect of every income year of a society, a tax on the profits and gains of the society at the following rates

(a) 2.5 per cent on all profits and gains up to $10,000,000;
(b) 2 per cent on all profits and gains exceeding $10,000,000 but not exceeding $20,000,000;
(c) 1.5 per cent on all profits and gains exceeding $20,000,000 but not exceeding $30,000,000;

(d) 1 per cent on all profits and gains in excess of $30,000,000."

We understand the worldwide income of an International/Exempt SRL is subject to this range of tax rates.

(iv) International/Exempt SRLs are not subject to withholding taxes on dividends, interest, royalties or other income which are paid to non-residents, another International/Exempt SRL or any other offshore entity, e.g. IBC, Offshore Bank, etc.

(v) We understand that Non-Exempt SRLs are subject to tax in Barbados on their worldwide income at the normal rate specified in the BITA (40%).

(vi) Similar to section 44 of the SRL Act, section 11 of the IBC Act overrides the BITA with respect to the tax treatment of IBCs; it states that "an international business company shall not be liable to pay any tax under the Income Tax Act except as is provided by section 10 hereof in respect of an income year, nor shall it be liable under this or any other enactment to pay any other direct tax on its profits and gains in respect of that income year".

(vii) Similar to subsection 43(1) of the SRL Act, subsection 10(1) of the IBC Act limits the tax rate on various ranges of income of an IBC incorporated in Barbados, in lieu of the rate specified in the BITA, as follows:

"(1) Subject to this section and section 11, in lieu of tax at the rate specified under the Income Tax Act, there shall be levied and paid to the Commissioner of Inland Revenue, in respect of the income year 1991 and in each subsequent income year of an international business company, a tax on the profits and gains of the company at the following rates

(e) 2.5 per cent on all profits and gains up to $10,000,000;
(f) 2 per cent on all profits and gains exceeding $10,000,000 but not exceeding $20,000,000;
(g) 1.5 per cent on all profits and gains exceeding $20,000,000 but not exceeding $30,000,000;

(h) 1 per cent on all profits and gains in excess of $30,000,000."

We understand the worldwide income of an IBC that is incorporated in Barbados is subject to this range of tax rates.

(viii) IBCs are not subject to withholding taxes on dividends, interest, royalties or other income which are paid to non-residents or another IBC. IBCs are also subject to similar trading restrictions as an International/Exempt SRL, for example, an IBC must not trade in goods or services in Barbados or any of the Caribbean countries which form part of the Caricom.

The Issues

You have asked for our comments on the following issues:

1. Is a SRL a corporation for purposes of the Act?

2. Are SRLs entitled to benefits under the Barbados Convention, specifically, are SRLs excluded from the application of the Barbados Convention by virtue of Article XXX(3) of that Convention?

3. Does Article XXVII(3) of the Barbados Convention apply to override the reassessment period provided for in subparagraph 152(4)(b)(iii) of the Act with respect to the transfer by XXXXXXXXXX of the U.S. rights to XXXXXXXXXX to XXXXXXXXXX?

4. Are SRLs resident in a designated treaty country for purposes of Part LIX of the Income Tax Regulations (Canada) (the "ITR")?

Our Comments

Corporate Status

In technical interpretation #9531605 dated March 18, 1996, we indicated that we were of the view that a SRL created under the SRL Act would be a corporation for the purposes of the Act and, in particular for purposes of the definition of a foreign affiliate in subsection 95(1) of the Act.

Based on our review of the SRL Act and the SRL Regulations, the characteristics of a SRL has not changed since that technical interpretation. In particular, although there are some characteristics of the SRL which are not characteristics of a corporation but more similar to a partnership, for example, the requirement that the society have two or more members, the limited life of the society and the limited rights of a transferee upon the transfer of quotas, the SRL Act gives the SRL many characteristics of a corporation, i.e., corporate personality, the powers of an individual and restricted liability; such that the SRL more closely resembles a corporation under Canadian common law. Therefore, it remains our view that a SRL (whether a Non-Exempt SRL or an International/Exempt SRL since their legal characteristics are the same) would be a corporation for purposes of the Act, and in particular for purposes of the definition of a foreign affiliate in subsection 95(1) of the Act. Accordingly, XXXXXXXXXX and XXXXXXXXXX would be considered corporations for purposes of the Act.

Treaty Benefits

Article XXX(3) of the Barbados Convention provides as follows:

"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."

Pursuant to Article XXX(3) of the Barbados Convention, IBCs are not entitled to benefits under the Barbados Convention. As described above, an International/Exempt SRL licensed under Part VII of the SRL Act are entitled to the same special tax benefit as an IBC incorporated in Barbados, that is, it is subject to tax in Barbados on its worldwide income at the lower rates ranging from 1% to 2.5% instead of the normal higher rate specified in the BITA (40%). Other features of Part VII of the SRL Act are also similar to the IBC Act, for example, an International/Exempt SRL is subject to similar trading restrictions as an IBC and both types of entities could lose their licence and special tax benefit if they contravene such trading restrictions.

We are therefore of the view that an International/Exempt SRL is a company¹ entitled to a special tax benefit under a law similar to the International Business Companies (Exemption from Income Tax) Act, Cap 77 (i.e., Part VII of the SRL Act) enacted by Barbados in addition to that law for purposes of Article XXX(3) of the Barbados Convention. Accordingly, the Barbados Convention does not apply to International/Exempt SRLs and International/Exempt SRLs such as XXXXXXXXXX and XXXXXXXXXX are not entitled to benefits under that Convention.

However, based on our understanding that a Non-Exempt SRL that is considered resident in Barbados for Barbados tax purposes (i.e., its mind and management is located in Barbados) is subject to tax in Barbados on its worldwide income at the normal higher rate specified in the BITA (40%), we are of the view that Article XXX(3) would not apply to such a Non-Exempt SRL, rather such a Non-Exempt SRL should be considered a resident of Barbados under Article IV(1) of the Barbados Convention.

Reassessment Period / Article XXVII(3) of the Barbados Convention

It appears that the transfer by XXXXXXXXXX of the U.S. rights to XXXXXXXXXX to XXXXXXXXXX is a transaction between the taxpayer (XXXXXXXXXX) and a non-resident person with whom the taxpayer was not dealing at arm's length (XXXXXXXXXX). We therefore agree that the extended reassessment period under subparagraph 152(4)(b)(iii) (7 years since XXXXXXXXXX is not a Canadian-controlled private corporation) would apply to this transaction. The issue is whether this reassessment period is overridden by the shorter 5-year period provided in Article XXVII(3) of the Barbados Convention. Article XXVII(3) provides as follows:

"A Contracting State [Canada in this case] shall not, after the expiry of the time limits provided in its national laws and, in any case, after five years from the end of the taxable period in which the income concerned has accrued, increase the tax base of a resident of either Contracting State [XXXXXXXXXX who is a resident of Canada in this case] by including therein items of income which have also been charged to tax in the other Contracting State [Barbados in this case]. This paragraph shall not apply in the case of fraud, wilful default or neglect." [Emphasis added]

We are of the view that Article XXVII(3) of the Barbados Convention would not apply to the transfer by XXXXXXXXXX of the U.S. rights to XXXXXXXXXX to XXXXXXXXXX because the income that would be included in XXXXXXXXXX tax base for Canadian tax purposes would not have also been charged to tax in Barbados.

Resident in a Designated Treaty Country

As you know, in order for a foreign affiliate to accumulate exempt earnings pursuant to paragraph (d) of the definition of exempt earnings in subsection 5907(1) of the ITR, the foreign affiliate must be resident in a designated treaty country.

As we have stated at the 1996 Corporate Management Tax Conference (see documents #6M12570 and #9619090), the term "resident in a designated treaty country" is not defined. Therefore, in our view, general Canadian common law principles, being the central management and control test, apply in determining whether a foreign affiliate is otherwise resident in a designated treaty country. However, subsection 5907(11.2) of the ITR deems, for purposes of Part LIX of the ITR, the foreign affiliate not to be resident in the designated treaty country unless one of the requirements in paragraphs 5907(11.2)(a), (b), (c) or (d) of the ITR are satisfied. The resident test for purposes of Part LIX of the ITR is a two-pronged test. Firstly, the foreign affiliate must be resident in a designated treaty country under Canadian domestic law and secondly, the foreign affiliate must satisfy one of the requirements stipulated in paragraphs 5907(11.2)(a), (b), (c) or (d) of the ITR.

We have assumed that XXXXXXXXXX and XXXXXXXXXX are resident in Barbados under general Canadian common law principles, that is, their central management and control are located in Barbados. As discussed above, we are of the view that the Barbados Convention does not apply to International/Exempt SRLs such as XXXXXXXXXX and XXXXXXXXXX. This issue is therefore whether International/Exempt SRLs satisfy the test in paragraph 5907(11.2)(c) of the ITR. Paragraph 5907(11.2)(c) of the ITR states:

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

Thus, in order for an International/Exempt SRL to satisfy the test in paragraph 5907(11.2)(c) of the ITR, it must be established that it would be a resident of Barbados for purposes of the Barbados Convention but for Article XXX(3) of that Convention, a provision in the Barbados Convention that has not been amended after 1994 and that provides that the Barbados Treaty does not apply to the International/Exempt SRL. In accordance with the principles set out in The Queen v. Crown Forest Industries Limited, 95 DTC 5389 (S.C.C.), it must be established that the International/Exempt SRL is liable to tax in Barbados on as comprehensive a basis as exists in Barbados, that is, on worldwide income.

As we have stated in the past (see, for example, documents #XXXXXXXXXX and #2000-0047365), an IBC incorporated in Barbados would be a resident of Barbados for purposes of the Barbados Convention but for Article XXX(3) of that Convention and therefore would satisfy the test in paragraph 5907(11.2)(c) of the ITR since such an IBC is liable to tax in Barbados on its worldwide income (albeit at lower rates).

We are of the view that the same reasoning in the case of an IBC incorporated in Barbados can be applied to an International/Exempt SRL. In other words, in our view, an International/Exempt SRL would be a resident of Barbados for purposes of the Barbados Convention but for Article XXX(3) of that Convention and therefore would satisfy the test in paragraph 5907(11.2)(c) of the ITR since an International/Exempt SRL is liable to tax in Barbados on its worldwide income (albeit at lower rates). Accordingly, assuming that XXXXXXXXXX and XXXXXXXXXX are resident in Barbados under general Canadian common law principles, that is, their central management and control are located in Barbados, they would be considered resident in a designated treaty country for purposes of Part LIX of the ITR.

As discussed above, we are of the view that a Non-Exempt SRL that is subject to tax in Barbados on its worldwide income at the normal higher rate specified in the BITA (40%) should be considered a resident of Barbados under Article IV(1) of the Barbados Convention and therefore would satisfy the condition in paragraph 5907(11.2)(a) of the ITR. Thus, assuming that the Non-Exempt SRL is resident in Barbados under general Canadian common law principles, it would also be considered resident in a designated treaty country for purposes of Part LIX of the ITR.

We trust that our comments have been helpful.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Jim Wilson
Section Manager
For Division Director
International and Trust Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ The term "company" is defined in paragraph 1(a) of Article III of the Barbados Convention to mean, inter alia, "any body corporate". As indicated above, sections 56 and 57 of the SRL Act refer to a SRL as a body corporate.

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