November 25, 2010 by Canadian Underwriter
The Canada Revenue Agency (CRA) has confirmed that business income earned by a Barbados “exempt insurance company” (EIC) may generally be repatriated to Canada free of Canadian tax, despite the EIC being subject to a very low amount of tax in Barbados.
An EIC is a company licensed under the Barbados Exempt Insurance Act (BEIA) to carry on “exempt insurance business,” which is “the business of insuring risks located outside Barbados in respect of which premiums originate outside Barbados,” according to a Nov. 12, 2010 online posting by the Osler Tax Group.
Under Canada’s Income Tax Act, “exempt surplus” dividends from a foreign affiliate may generally be received by a Canadian corporate shareholder free of Canadian tax, as long as the foreign affiliate is “resident” in a designated treaty country.
Under the Canada-Barbados Tax Treaty, residency depends in part on whether or not the company is liable to pay taxes in Barbados.
Initially, the CRA’s position was that an EIC was “effectively exempt from taxation in Barbados for a guaranteed period of 30 years (aside from a nominal tax that CRA viewed as being essentially an annual licensing fee), and as such was not subject to the most comprehensive form of taxation of a person under the law of Barbados,” as Osler’s tax group frames it.
But the CRA’s most recent clarification effectively reverses this position. CRA now agrees EICs are “liable to tax” in Barbados within the meaning of the Canada-Barbados Tax Treaty.
The CRA’s original interpretation was a subject of discussion at the RIMS Canada Conference in September 2010.
“Today’s interpretation brings to a satisfactory conclusion a matter that had given rise to an extended period of uncertainty among Canadian investors in Barbados’ international insurance industry,” says Senator Darcy Boyce, minister in the office of the prime minister with responsibility for Invest Barbados, telecommunications, energy and immigration for Barbados.
“Not only does it quell concerns that Canada’s negotiation of Tax Information Exchange Agreements with our regional competitors might provide Canadian foreign affiliates in those jurisdictions with a competitive advantage over Barbados, it demonstrates and reinforces Barbados’ commitment to its existing clients conducting business in Barbados.”