The Department of Finance announced the Protocol amending the Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital entered into force on December 17, 2013. The Protocol generally applies to taxes that arise, or taxation years that begin, on or after January 1, 2014. The exchange of information amendments are effective December 17, 2013.
Canada and Barbados signed a Protocol to their current income tax treaty on November 8, 2011. In addition to the inclusion of OECD-style exchange of information language, several significant changes to the treaty have now been incorporated in the Protocol to:
- Introduce a “look-through” rule for gains derived from dispositions of shares and partnership, trust and other interests that derive their value principally from immovable property situated in a State
- Allow Barbados International Business Companies (IBC), exempt insurance companies, qualifying insurance companies and similar entities to be considered residents of Barbados under Article IV (but still not entitled to treaty benefits under Articles VI to XXIV)
- Change the resident tie-breaker rules.
New “look-through” provision for capital gains
The Protocol amends the treaty to include a look-through rule for gains derived from dispositions of shares and partnership, trust and other interests that derive their value principally from immovable property situated in a State. This amendment will apply to taxation years beginning on or after January 1, 2014 (Article XIV).
Currently, the treaty only allows gains to be taxed in a State if they result from the disposition of shares or interests where the particular entity’s property consists principally of immovable property. There is no look-through to any underlying entity that might also derive its value principally from immovable property. As such, a Barbados company can currently sell the shares of a Canadian holding company whose only property is shares of a Canadian real estate company, and any gain should not be subject to tax in Canada.
Assuming that the Canadian holding company's shares derive their value principally from the Canadian real estate company’s immovable property, any gain on their disposition should be subject to tax in Canada under the Protocol.
The introduction of the “look-through” rule is consistent with Canada’s treaties with other countries, which provide Canada with the right to tax capital gains arising from the disposition of shares or other interests where the value of that interest is derived principally from immovable property situated in Canada.
IBCs can now be considered residents of Barbados
The Protocol amends the treaty to allow IBCs, exempt insurance companies, qualifying insurance companies and other similar entities to be considered residents of Barbados under Article IV. These entities are still not entitled to treaty benefits under Articles VI to XXIV but, because they will no longer be carved out of the residency article, will still be considered residents of Barbados for Canadian surplus purposes (Article XXX).
The current treaty prohibits Barbados IBCs, and other companies entitled to similar special tax regimes, from claiming benefits under the treaty. As a result, such companies have had to rely on a specific Canadian domestic rule to be considered residents of a designated treaty country and to qualify to earn exempt surplus. This domestic rule applied to Barbados IBCs because the current Barbados treaty, which had entered into force prior to 1995, had not been amended since that time. The amendment to the treaty clarifies that IBCs and similar entities will no longer need to rely on this domestic rule to qualify to earn exempt surplus.
Changes to definition of “resident of a Contracting State”
Under the current treaty, the term “resident of a Contracting State” is defined to mean any person who, under the law of that State, is liable to tax by reason of his domicile, residence, place of management or any other similar criterion. While this definition effectively remains the same under the Protocol, it now excludes a person who is liable to tax only in respect of income from sources in the particular State.
Resident tie-breaker rules
The Protocol introduces a new corporate tie-breaker rule that defaults to the State of which the corporation is a “national”. A “national” is defined to be any legal person deriving its status as such from the laws in force in a particular State. Under this new provision, a corporation incorporated in Barbados but effectively managed from Canada will be considered a resident of Barbados, and not of Canada (Article IV).
Under the current treaty, the corporate tie-breaker rule requires a determination by Competent Authority. Accordingly, if the CRA argued that a corporation incorporated in Barbados had its mind and management in Canada, the corporation would have to go through a lengthy Competent Authority process to determine where it was resident and subject to tax.
The Competent Authority process to determine residency will continue to apply to persons other than individuals or corporations. As such, Barbados resident trusts that are deemed to be resident in Canada because of their mind and management, such as in the Garron and Antle cases, will need to go to Competent Authority for a final residency determination.
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We can help
Your KPMG adviser can help you assess the impact of the Protocol on your business, and point out ways to take advantage of any benefits arising from the new rules or help mitigate their impact. For more details, contact your KPMG adviser.
Information is current to December 19, 2013. The information contained in this TaxNewsFlash-Canada 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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