Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Tax, September 2009
On August 29, 2009, Canada signed its first tax information exchange agreement (TIEA) with the Netherlands in respect of the Netherlands Antilles (which is specifically not covered by the tax convention between Canada and the Netherlands) (the Netherlands Antilles TIEA). A TIEA is a bilateral agreement wherein two countries agree to exchange information relevant to the administration and enforcement of their domestic tax laws. The 2007 Canadian federal budget (2007 Budget) introduced tax benefits, discussed below, for dividend payments from corporations resident in countries that do not have a tax convention with Canada but sign a TIEA with Canada. The Netherlands Antilles TIEA is based on a model agreement produced by the Organization for Economic Cooperation and Development (OECD Model Agreement).
The Netherlands Antilles TIEA will require a country which receives a request from the other country for information "foreseeably" relevant to the administration and enforcement of the other country's tax law to provide that information. It appears that "foreseeably" is intended to be given a broad interpretation but not to include "fishing expeditions". If the information requested is not in the possession of the requested authorities, they must use such legal means as may be available to them to obtain the information; however, they are not required to provide information that is not in their possession or in the possession or control of persons within their jurisdiction. The circumstances in which a requested country can decline to collect the requested information are limited, and include:
1. The requesting country would not be entitled to obtain the information under its domestic law;
2. The requested information is subject to solicitor-client privilege under the law of the requested country; and
3. Secret or trade processes.
Under circumstance 1 above, it is the law of the requesting country – not that of the requested country – that is the standard to be used by the requested country in refusing a request for information. In this regard, bank privacy laws and laws applicable to agents and trustees in the requested country may be overridden. Canada and the Netherlands agree to enact legislation to give effect to the terms of the Netherlands Antilles TIEA.
The Netherlands Antilles TIEA closely follows the OECD Model Agreement with little significant variation. It will enter into force on the first day of the third month after each party has notified the other in writing that the internal procedures required by that country for the entry into force of the TIEA have been complied with. The agreement is retroactive with respect to matters involving criminal charges. With respect to all other matters, it applies only in respect of taxable periods beginning on or after the date it comes into force, or where there is no taxable period (such as withholding taxes), with respect to all charges to tax arising on or after that date.
The Netherlands Antilles TIEA may affect the taxation of dividends received by a Canadian corporation from a foreign affiliate (FA) resident in the Netherlands Antilles. Prior to 2008, active business income earned by FAs resident in jurisdictions with which Canada did not have a tax convention was subject to Canadian tax upon repatriation with a credit for any tax paid in the other jurisdiction. The 2007 Budget amended these rules such that dividends paid from active business income of an FA resident in a jurisdiction with which Canada has a TIEA will be considered exempt surplus and not be subject to tax in Canada when paid to its Canadian corporate shareholder. As a result, dividends paid by an FA resident in the Netherlands Antilles from active business income earned in the Netherlands Antilles to Canadian corporate shareholders will no longer be subject to Canadian tax. This change will apply to income earned by an FA resident in the Netherlands Antilles effective on the first day of the FA's taxation year that includes the day the Netherlands Antilles TIEA enters into force.
The 2007 Budget also introduced a penalizing provision which will deem business income earned by a controlled FA at a particular time to be subject to tax in Canada on an accrual basis where the controlled FA is resident in a jurisdiction with which:
1. Canada does not have a tax convention;
2. Canada does not have a TIEA; and
3. Canada has, more than 60 months before the particular time, either begun or sought to begin negotiations for a TIEA.
However, this rule will not apply before 2014 to jurisdictions with which Canada was, on March 19, 2007, in the course of negotiating a TIEA. This rule is intended to encourage jurisdictions with which Canada had no tax convention to enter into a TIEA with Canada.
Canada has also recently announced that it is currently in TIEA negotiations with the following jurisdictions: Anguilla, Aruba, Bahamas, Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Saint Kitts and Nevis, Saint Lucia and Turks and Caicos Islands. Negotiations with the British Virgin Islands, the Isle of Man and Jersey commenced in 2005. However, due to the fact that Canada was negotiating a TIEA with these jurisdictions on March 19, 2007, the new penalizing rule will not apply to them until 2014, if ever. Negotiations with the remaining jurisdictions commenced in 2009. It is expected that the TIEAs with these jurisdictions will follow the OECD Model Agreement.
If Canada concludes a TIEA with any of the jurisdictions listed above, then Canadian corporations may want to consider whether such jurisdiction could be used in structuring offshore investments. Generally, the aforementioned jurisdictions have very low domestic tax rates and no withholding taxes. An FA resident in such jurisdiction could be used to earned active business income or to earn investment income that is deemed to be active business income. Potentially offsetting the advantage of low tax rates is the fact that many of the jurisdictions have a limited tax convention network.
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.