15 June 2002 External T.I. 2000-0047365 - Barbados Treaty 5907(11.2)(c) Regulations

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:

Where a foreign affiliate, that is incorporated in Barbados and is an international business company under the Barbados International Business Companies Act ("IBCA"), is liable to tax in Barbados on its worldwide income under the Barbados Income Tax Act and IBCA, whether the foreign affiliate would satisfy the conditions in paragraph 5907(11.2)(c) of the Income Tax Regulations ("Regulations")?

Position:

Yes.

Reasons:

The foreign affiliate would be a resident of Barbados for the purposes of the Barbados Treaty but for paragraph 3 of Article XXX of the Barbados Treaty (which provides that the Barbados Treaty does not apply to the foreign affiliate).

2000-004736
XXXXXXXXXX Daniel Wong
(613) 954-4949
June 11, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: the Canada-Barbados Income Tax Convention (the "Barbados Treaty") and the exempt surplus rules in Part LIX of the Income Tax Regulations ("Regulations")

This is in reply to your letter of September 15, 2000 wherein you requested our opinion as to whether, in the scenario described below,

(a) the income earned by a foreign affiliate ("Foreign Affiliate") of a Canadian corporation ("Canadian Corporation") from its active business carried on in Barbados will only be taxed in Barbados due to the Barbados Treaty; and

(b) the Foreign Affiliate will be able to declare and pay a dividend to the Canadian Corporation tax-free.

The Foreign Affiliate is a non-resident of Canada and its central management and control is in Barbados. It is incorporated in Barbados and is registered in Barbados as an international business company ("IBC") under the Barbados International Business Companies Act (the "IBCA). The Foreign Affiliate manufactures goods in Barbados and sells them to the Canadian Corporation for a profit. The Canadian Corporation then resells these goods to unrelated persons in Canada.

The Foreign Affiliate is subject to tax in Barbados under the Barbados Income Tax Act (the "BITA") and is entitled to special tax benefits under the IBCA.

Our Comments

In your letter, you outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R4, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following comments that we hope will be of assistance to you.

Under the Income Tax Act (the "Act"), non-residents of Canada are generally subject to tax in Canada in respect of their income from sources in Canada including income from businesses carried on by them in Canada. Whether a person is carrying on business in Canada is principally a question of fact. The term "carrying on business" in Canada is not expressly defined in the Act but certain activities are deemed to constitute carrying on business in Canada by virtue of section 253 of the Act.

Where the Foreign Affiliate carries on business in both Barbados and Canada, its income that is attributable to its business carried on in Canada, is subject to tax in Canada under subsection 2(3) and paragraph 115(1)(a) of the Act. The treaty exemption in paragraph 1 of Article VII of the Barbados Treaty, that exempts the Foreign Affiliate's income earned in Canada that is not attributable to a permanent establishment situated in Canada, is not available to the Foreign Affiliate, as the Barbados Treaty does not apply to companies that are entitled to any special tax benefit under the IBCA (i.e. an IBC) by virtue of paragraph 3 of Article XXX of the Barbados Treaty, which states

"3. 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."

Further, where the Foreign Affiliate and the Canadian Corporation are not dealing at arm's length with each other, Part XVI.1 of the Act (transfer pricing) may be applicable with respect to the sale of the goods by the Foreign Affiliate to the Canadian Corporation. Information Circular 87-2 provides guidelines for transfer pricing in Canada. You may obtain a copy of the IC from a near-by local taxation services office or from the Canada Customs and Revenue Agency website at http://www.ccra-adrc.gc.ca.

Generally, where a foreign affiliate of a Canadian corporation carries on an active business in a designated treaty country through a permanent establishment situated therein, for the purposes of Part LIX of the Regulations, the foreign affiliate is entitled to earn exempt surplus, provided that, inter alia, its earnings meet the definition of "exempt earnings" in subsection 5907(1) of the Regulations. One of the requirements in paragraph (d) in the definition of "exempt earnings" is that the foreign affiliate must be resident in the designated treaty country. The exempt surplus of the foreign affiliate can be repatriated back to Canada by having the foreign affiliate pay a dividend out of its exempt surplus to the Canadian corporation, which dividend, when received by the Canadian corporation, will be deductible to the Canadian corporation under paragraph 113(1)(a) of the Act.

For the purposes of Part LIX of the Regulations, the foreign affiliate is resident in the designated treaty country provided that, firstly, it is resident in the designated treaty country under Canadian domestic law (being the central management and control test) and, secondly, it satisfies one of the requirements stipulated in paragraphs 5907(11.2)(a), (b), (c), or (d) of the Regulations.

As the Barbados Treaty does not apply to companies that are entitled to any special tax benefit under the IBCA, paragraph 5907(11.2)(c) of the Regulations is relevant, which 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;"

It is a question of mixed fact and law whether a foreign affiliate satisfies the conditions in paragraph 5907(11.2)(c). This can be determined only upon an examination of all of the relevant facts surrounding the particular circumstance.

Where the Foreign Affiliate, that is an IBC, is liable to tax in Barbados on its worldwide income under the BITA and IBCA, it is our view that the Foreign Affiliate would be a resident of Barbados for the purposes of the Barbados Treaty but for paragraph 3 of Article XXX of the Barbados Treaty (which provides that the Barbados Treaty does not apply to the Foreign Affiliate) and, as a result, the requirement in paragraph 5907(11.2)(c) would be satisfied.

These comments are provided in accordance with paragraph 22 of Information Circular 70-6R4.

Yours truly,

Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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