Introduction

The tax information exchange agreement (the "TIEA") signed on 24 June 2010 by Canada and the Cayman Islands is now effective having come into force on 1 June 20111. This development represents yet another example of the commitment of the Cayman Islands to international standards of tax transparency. Furthermore, this makes the Cayman Islands an even more attractive destination for Canadian corporations given its favourable tax regime coupled with its sophisticated financial services infrastructure.

Now that the Cayman Islands are a "designated treaty country", Canadian corporations (in particular, large oil and gas and resource companies) may look beyond Canada's traditional partners such as Barbados, Ireland and Cyprus. The principal offshore financial centres of the Caribbean, the Cayman Islands and Bermuda, are now prime jurisdictions for offshore corporate structuring by Canadian based corporations. The British Virgin Islands is expected to be added to that list by the end of 2011.

Cayman Islands: "Designated Treaty Country"

The TIEA not only sets out a framework for the exchange of information relevant to the domestic tax laws of each party, its entry into force also results in the Cayman Islands becoming a "designated treaty country" for purposes of Canada's Income Tax Regulations (the "Regulations"). This designation is an important one for any Canadian corporations with international operations. More particularly, we understand that the Regulations provide that actual or deemed business profits of a company resident in and carrying on an active business in a "designated treaty country" are generally eligible for tax free dividend repatriation to a Canadian parent as "exempt surplus".

Consequently, Canadian corporations now have increased flexibility and greater choice of jurisdictions for Canadian investment eligible for Canada's favourable exempt surplus regime.

Other countries also enjoy the "designated treaty country" designation by virtue of either entering into bilateral TIEAs of their own or double taxation treaties with Canada. However, very few countries enjoy both the designation and the favourable tax regime of the Cayman Islands which does not impose any income, corporate, capital gains, or withholding tax. Accordingly, the Cayman Islands are ideally placed as a jurisdiction of choice for Canadian corporations looking to structure their international investments and operations. By establishing an active Cayman subsidiary and structuring its international operations appropriately, a Canadian corporation may enjoy considerable tax advantages.

Conclusion

Now that the TIEA is in force and the Cayman Islands is a "designated treaty country", it is possible to earn active business income through a Cayman subsidiary and repatriate that income to Canada without any adverse Canadian or Cayman tax consequences. Accordingly, these favourable developments from a tax perspective coupled with the sophisticated financial infrastructure and strong commitment to international standards of tax transparency and international co-operation make the Cayman Islands an even more attractive jurisdiction for Canadian corporations structuring their international operations.

Footnotes

1 The Canadian Department of Finance announced the entry into force of the TIEA with the Cayman Islands on 2 June 2011.

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