Canada: Canada-Barbados Tax Treaty - New Protocol

On November 8, 2011, a new protocol (Protocol) amending the Canada-Barbados Income Tax Agreement (Treaty) was signed by the two countries, updating the Treaty to conform with current tax treaties and to reflect Canada's commitment to promote exchange of tax information in accordance with OECD1 standards. Assuming the Protocol is ratified by each country in 2012, as expected, most of its provisions will be effective January 1, 2013, subject to specific coming into force provisions.

This update highlights certain of the proposed changes to the Treaty.

International Business Companies and Similar Entities

International Business Companies (IBCs) and certain other Barbados entities with special tax benefits2 are completely excluded from the Treaty,3 such that they are not currently entitled to any of the benefits of the Treaty. Recent Canadian cases confirmed that the five year limitation period in Articles XI(3) and XXVII(3) of the Treaty for reassessments by the Canada Revenue Agency (CRA) did not apply to an IBC, on the basis that no portion of the Treaty applied to IBCs.4

The Protocol proposes to extend the Treaty to IBCs or other entities entitled to special tax benefits, although the extension is expressly limited.5 IBCs and such entities are not entitled to the benefits of Articles VI to XXIV (e.g., income from immovable property, business profits, dividends, interest, royalties, gains). For example, dividend payments by a Canadian resident to an IBC would still be subject to a 25% withholding tax under Canadian domestic tax rules.6

However, an IBC will be able to benefit from other provisions of the Treaty, most notably the new rules regarding residency discussed below, the five year limitation period for reassessments7 and the mutual agreement procedure (MAP).8 At the same time, IBCs will be subject to the new comprehensive exchange of information rules.9

The extension of some of the benefits of the Treaty to IBCs and similar entities will likely increase their use by Canadian corporations in their foreign affiliate and other outbound structures.


It appears that, in light of recent Canadian tax cases such as Garron Family Trust v. the Queen,10 Antle v. the Queen11 and Sommerer v. the Queen,12 the CRA is more willing to challenge the tax residency of foreign trusts and other entities and to treat them as residents of Canada for tax purposes. In such circumstances, tax treaties become more relevant in ensuring that the entities are not subject to double taxation where two countries claim that the entity is a resident for tax purposes.

Currently, disputes between Canada and Barbados over the residency of persons is settled under the MAP.13 The Protocol proposes a new tie-breaker rule to determine residency for a company,14 without resort to the MAP. Specifically, where a company is a "national" of a Contracting State and by reason of Article IV(1) it is a resident of both Contracting States, it will be deemed to be a resident only of the first Contracting State.15 "National" is defined as "any legal person, partnership and association deriving its status as such from the law in force in a Contracting State."16 Thus, if, for example, an IBC were considered to be a resident of Barbados under Barbados tax law, it would be entitled to rely on this provision if the CRA were to allege that it is also a resident of Canada.17

It is understood that Barbados tax rules do not deem a Barbados company to be a resident of Barbados, unlike Canadian tax rules.18 Accordingly, a Barbados company must still establish Barbados tax residency under the common law test of place of management or central management and control. Notwithstanding this obligation, the addition of the corporate tie-breaker rule in the Treaty will provide greater certainty.

In the context of Canadian multinationals, Barbados has been a common jurisdiction used primarily for a holding corporation or financing vehicle for businesses carried on in other countries. In general, a foreign affiliate of a Canadian corporation does not benefit from the "exempt surplus" rules unless the affiliate is a resident of another country for the purposes of a tax treaty between such country and Canada.19 While this rule normally would exclude IBCs, EICs and similar entities, as they are expressly excluded from the benefit of the Treaty,20 grandfathering is available as long as the provision of the Treaty that excludes them has not been amended.21 As discussed above, the Protocol does amend this provision, however, the effect of the amendment coupled with the corporate residency tie-breaker is that such entities no longer need to rely on the grandfathering to qualify for benefits under the Treaty.

Canadian Investments via Barbados

In addition to being a common jurisdiction used in Canadian outbound structures, Barbados has been a popular jurisdiction used by non-residents when investing in Canada, in particular in Canadian real estate and natural resources. Under Canadian domestic rules,22 non-residents of Canada are generally only liable for Canadian capital gains tax on dispositions of "taxable Canadian property" (TCP).23 Recent amendments have considerably reduced the types of properties that constitute TCP.24 In particular, unlisted shares of most corporations or interests in a partnership or trust will be TCP at a particular time only if, at any time during the preceding 60 months, more than 50% of their fair market value was derived directly or indirectly from a combination of real or immovable property situated in Canada, Canadian resource properties, timber resource property and options, interests or civil law rights therein.25

This definition of TCP is consistent with the general international tax principle that the country in which immovable property is located should have the right to tax the gains from the disposition of such property.26 For example, the OECD model treaty provides that gains "from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property" situated in a country may be taxed in that country.27

A number of existing tax treaties between Canada and other countries provide more favourable treatment than the ITA for non-residents. In particular, under Article XIV(3) of the Treaty, Canada may tax the gains from the alienation of shares of a company, or an interest in a partnership or a trust, "the property of which consists principally of immovable property" situated in Canada.28 This wording is identical to that in the Canada-Israel Tax Convention, considered by the CRA in a recent interpretation where an Israeli company owned all of the common shares of a Canadian holding corporation that in turn owned shares of Canadian subsidiaries holding immovable property situated in Canada. The position of the CRA is that where the words "shares of a company the property of which consists principally of immovable property" are used in a tax treaty, the non-resident will not be liable to tax in Canada where the non-resident is disposing of shares of a holding company whose assets consist of shares of other companies (considering only the assets directly owned by the company). The CRA noted that the Department of Finance was made aware of this interpretation and changed the expression used in the Canadian model for tax treaties to "derived principally". The CRA further commented as follows:

As the UN and OECD treaty models do not use the same wording as the [Canada-Israel] Treaty, the interpretation of the expression used in those models can be different. The OECD model uses the expression "deriving more than 50% of their value directly or indirectly" which we consider as being broader than "consists principally." The expression "consists directly or indirectly" is the expression that the UN preferred for article 13 as indicated in the Manual for the negotiation of bilateral Tax Treaties and it is another expression that we consider broader than "consists principally."

The difference in the wording in Article XIV(3) of the Treaty from the TCP definition has been relied upon by tax residents of Barbados who have used a holding corporation, trust or partnership to hold Canadian investments in real property and resource properties, and thereby not be subject to Canadian taxation on a sale of the shares of the holding corporation or the interests in the partnership or trust.

The proposed Protocol change conforms the language in Article XIV to that in the OECD model treaty. As noted above, the Treaty already expanded the rule in the OECD model treaty to apply to interests in partnerships and trusts, which has similarly been maintained in the Protocol. No grandfathering of existing ownership structures or accrued gains is contained in the Protocol.

In light of the changes to Article XIV(3), non-residents holding Canadian investments through a Barbados entity may wish to consider restructuring their ownership to minimize Canadian tax on divestment of indirect Canadian — situs property. Strategies to consider include: disposing of the investments held by the Barbados entity to "step up" their tax cost and protect accrued gains; changing the asset mix so that the value is no longer derived "principally" from Canadian real property or resource property; shifting the tax residence of the Barbados entity by moving its place of management or by migration to a country with a favourable tax treaty; and interposing an intermediary entity that is a tax resident of another country with a favourable tax treaty. Relying on the Canada-Israel tax treaty, which has language similar to the Treaty, is likely not an option, since the Department of Finance has recently announced that negotiations to update the Canada-Israel tax treaty will begin in January, 2012.29 Anti-avoidance rules and treaty shopping generally need to be kept in mind in any planning.30 The recent developments in other countries, as reflected in the Indian tax case of Vodaphone International Holdings BV31 and similar cases, need also to be kept in mind.


1 Organization for Economic Co-Operation and Development.

2 Others include Exempt Insurance Companies (EICs). Note that Article 5(2) of the Protocol contemplates that other entities may be added to the list by the two countries via an Exchange of Notes.

3 Article XXX(3) of the Treaty.

4 See Sundog Distribution Inc. v. the Queen, [2010] 6 C.T.C. 2151 (TCC) and Alberta Printed Circuits Ltd. v. the Queen., [2011] 5 C.T.C. 2001 (TCC) for discussions of the scope and effect of Article XXX(3) of the Treaty.

5 Amended Article XXX(3) of the Treaty, contained in Article 5 of the Protocol.

6 Income Tax Act (Canada) (ITA), as amended.

7 Article XXVII(3) of the Treaty.

8 Article XXVII of the Treaty.

9 Article XXVIII of the Treaty, as proposed to be amended by Article 4 of the Protocol.

10 [2011] 2 C.T.C. 7 (FCA), appeal to SCC to be heard March 13, 2012.

11 2010 D.T.C. 5172, 413 N.R. 128 (FCA).

12 [2011] 4 C.T.C. 2068 (TCC).

13 See Article IV(3) of the Treaty. Article IV(2) contains a number of tie-breaker rules in determining the tax residency of individuals, the last recourse being MAP.

14 Defined in Article III(1)(d) of the Treaty to mean a body corporate or an entity treated as such for tax purposes.

15 Article I of the Protocol.

16 Article III(1)(h) of the Treaty.

17 See the discussion in Garron, supra note 10, regarding the Treaty.

18 Subsection 250(4) of the ITA.

19 Regulation 5907(11.2)(a) to the ITA.

20 By virtue of Article XXX(3) of the Treaty.

21 Regulation 5907(11.2)(c) to the ITA.

22 Subsection 2(3) of the ITA.

23 Defined in subsection 248(1) of the ITA.

24 March 4, 2010 budget proposals, enacted July 12, 2010.

25Paragraph (d) of the definition of TCP in subsection 248(1) of the ITA.

26 The notes in the March 4, 2010 budget indicate that the TCP definition changes were in part to make the domestic rules more consistent with Canada's tax treaties.

27 Article 13(4) of Model Tax Convention on Income and on Capital (Paris: OECD, 2010).

28 CRA Views, 2008-030441I7, dated March 23, 2009.

29 See Department of Finance announcement dated December 2, 2011.

30 See the general anti-avoidance rule in 245 of the ITA. Note that the CRA will consider applying this rule if it is evident that a structure was put in place in an attempt to obtain tax relief from a tax treaty; see supra note 28.

31 Ruling of the India Supreme Court on the appeal from a September 2010 decision of the Bombay High Court is expected imminently.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions