23 July 1991 External T.I. 911405 F - Canada-Barbados Income Tax Convention

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.

Re: Canada-Barbados Income Tax Convention

This is in reply to your letter dated May 21, 1991 regarding the foreign tax credit provisions of the Canada-Barbados Income Tax Convention (the "Convention").  We have also reviewed the related correspondence that you received from the Department of Finance and the competent authority of Barbados and agree generally with the comments made therein.

The wording in paragraph 3 of Article XXV of the Convention is similar to the wording found in the corresponding article of numerous other treaties.  It applies to give a Barbados source, for purposes of the Convention and of section 126 of the Act, to income of a Canadian resident that is taxed in Barbados in accordance with the Convention.  While we do not give opinions on the operation of the tax law of Barbados it is evident from the comments of the competent authority of Barbados that management fees paid to a nonresident person by a person resident in Barbados is considered to be income derived from Barbados and thereby subject to tax at source in Barbados.

We should point out however that Article XIII of the Convention deals specifically with management fees as defined in paragraph 2 of that Article.  Pursuant to paragraph 4 of Article XIII a management fee shall be deemed to be derived from sources within Barbados when the payer is, inter alia, a resident of Barbados, provided that the management fee is not borne by a permanent establishment that the payer has in Canada.  We have assumed for purposes of this analysis that permanent establishment considerations are not relevant.  The comments in paragraph 4 are not restricted in their application to Article XIII and therefore apply for purposes of the Convention as a whole.  Therefore, had paragraph 3 of Article XXV of the Convention not existed, the above management fees would still be sourced to Barbados.  Paragraph 3 simply reinforces this fact.

As a result of the management fees being sourced to Barbados for purposes of the Convention any taxes paid to Barbados in respect of such fees would be creditable in Canada in accordance with subparagraph l(a) of Article XXV of the Convention.

It should also be noted that the maximum withholding tax on management fees that is creditable in Canada under the Convention would now be 5% of the gross amount of the management fee. Pursuant to paragraph 1 of Article XIII of the Convention, the withholding rate shall not exceed the lessor of 15% of the gross amount of the management fee and the lowest rate of Barbados tax that may be imposed under any agreement concluded or modified after the date of signature of the Convention on a management fee paid in similar circumstances to a resident of any other country which is not a member country of the Caribbean Common Market.  Pursuant to the recently ratified Barbados Finland Tax Convention, where a management fee is derived from sources within Barbados by a resident of Finland, the rate of tax imposed thereon by Barbados shall not exceed 5%.  This is the lowest withholding rate of any tax convention that Barbados has concluded.  As a result, it is also the rate that is applicable in similar circumstances under the Convention.  The effective date for the 5% rate is the date that the withholding tax provisions of the Barbados-Finland Tax Convention entered into force.  Should tax be withheld at a rate in excess of 5%, the "excess amount" would not be creditable in Canada and a refund should be requested from the tax authorities of Barbados.

We hope our comments are of assistance.

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