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Finance Releases More Flexible Rules for International Shipping 

Global Tax Adviser


July 16, 2013


The Department of Finance released for public comment draft legislation including among other things, proposals affecting the taxation of foreign affiliates, functional currency reporting and the residence of international shipping corporations on July 12, 2013. This article focuses on the amendments to the international shipping rules.

Tax policy
Finance notes that Canada's basic policy is not to tax the international shipping income of non-resident companies, provided their home countries provide Canadian companies a comparable exemption. This exemption is provided in paragraph 81(1)(c) and has been amended to among other things refer specifically to the term "international shipping".


New definition "international shipping"
The proposed legislation amends subsection 248(1) to add a new definition for "international shipping". The new definition lists activities that are considered international shipping and activities that are specifically excluded. This new definition is intended to clarify when the exemption in paragraph 81(1)(c), as well as when subsection 250(6) dealing with the residence of an international shipping corporation apply.


Residence of international shipping corporations - More flexible rules
A corporation is deemed to be generally resident throughout the year in the country in which it was incorporated and to not be a resident of Canada, where the requirements in subsection 250(6) are met. Thus, when the conditions in subsection 250(6) are met, an international shipping corporation may qualify for the exemption in paragraph 81(1)(c).


Currently, the conditions require among other things, that the corporation's principal business in a taxation year consist of the operation of ships used primarily in transporting passengers or goods in international traffic and all or substantially all of its gross revenue for the year be from the operation of ships in transporting such passengers and goods.


Finance states that the draft legislation amends subsection 250(6) "to introduce more flexible rules for international shipping corporations in order to reflect the structures of modern shipping organizations". As such the amendments implement several changes including amendments that:


  • Provide for the use of trusts and partnerships, both as holding entities and operating entities in a shipping group
  • Lower the ownership threshold that is required of certain "eligible entities" to 25% to accommodate a broader range of shipping group structures.
  • Allow "back-office" services to be provided by an entity in a shipping group to another entity that is part of the group and that engages directly in international shipping if, among other conditions, these services would have qualified as part of the company's shipping business if it were undertaken by it.


As part of these amendments definitions of "eligible entity" and "eligible interest" are proposed in new subsection 250(6.04). To qualify as an "eligible entity", a corporation, partnership or trust must either have international shipping as its principal business for the year or it must hold an "eligible interest" in one more eligible entities.


Thus, to qualify for the subsection 250(6) deeming rules, a corporation must either have international shipping as its principal business or it must have a significant investment in one or more corporations, partnerships or trusts that are eligible entities.


Also, all or substantially all of a corporation's gross revenue for the year must consist of any combination of gross revenue from international shipping, gross revenue from eligible interests held by an eligible entity, and interest on debt owing by an eligible entity in which an eligible interest is held.


The draft legislation amends the definition of "international traffic" in subsection 248(1) to include a partnership. Currently, it refers only to the activities of a "person".


The proposed international shipping rules will apply to taxation years that begin after July 12, 2013.


For more information, contact your KPMG adviser.






Information is current to July 16, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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