Barbados: Barbados Jurisdiction Gets ‘Stamp Of Approval' In Canadian Court Case

As a result of a recent decision of the Tax Court of Canada in CIT Group Securities (Canada) Inc. v. The Queen, the stamp of approval has been given to the use of the IBFS sector as an avenue for international corporate and financial  planning that is tax efficient. 


The decision highlights the importance of an effective regulatory framework, as such a framework gives legitimacy to the entities that come within the purview of its jurisdiction. In order to qualify for a certain exception from Canada's passive income rules (referred to as the "FAPI" rules), CCG had to prove that its activities as a foreign bank (or as a trust company) were regulated under the laws of Barbados. In this case the regulator was the Central Bank of Barbados ("the Bank"), and the approving conclusions of Owen J. with respect to the self-contained regulatory mechanisms of both the Financial Intermediaries Regulatory Act, Chapter 324A of the Laws of Barbados ("FIRA"), and the Financial Institutions Act, Chapter 324A of the Laws of Barbados ("FIA"), as also the regulatory oversight by the Central Bank, were highlighted. In addition, the learned judge also lauded the approach of the Central Bank with respect to its circumspection regarding inquiries made by unknown persons.

Factual Outline

The Appellant, CIT Group Securities (Canada) Inc., is the Canadian parent corporation of CCG Trust Corporation ("CCG") which is a regular Barbados company licensed to carry on business pursuant to the Financial Institutions Act, Chapter 324 of the Laws of Barbados. The principal business of CCG was entering into financing transactions that resulted in the holding of high quality long-term debt. Where CCG was unable to realize this business objective, it would temporarily invest its available cash in short-term debt such as short-term deposits and convertible asset swaps until a better opportunity arose. 

CCG is owned by nine international business companies, all incorporated under the Companies Act, Chapter 308 of the Laws of Barbados and licensed pursuant to the International Business Companies Act, Chapter 77 of the Laws of Barbados.

The Appellant was reassessed for each of its taxation years 2003 to 2009 inclusive (the "Taxation Years"). The reassessments included in the income of the Appellant, as income from shares, amounts in respect of income earned by CCG during each of the Taxation Years on the basis that such income was 'foreign accrual property income' ("FAPI") rather than "income from an active business as defined in subsection 95(1) of the Income Tax Act of Canada. The aggregate amount assessed for the Taxation Years exceeded $200m.

CCG had sufficient substance and met other conditions so that its business was not a passive "investment business" as defined, such that the legal conclusions depended in part on more technical issues, under a separate deeming rule in paragraph 95(2)(l) of the statute, such as whether CCG carried on its business as a "foreign bank" and whether its business was "regulated" under Barbados law."  Based on a very detailed textual, contextual and purposive interpretation, Owen J. concluded that these conditions were also met so the exception to this separate deeming rule was applicable.  Thus, CCG's income was "income from an active business" and not FAPI.

In reviewing  the case, Owen J.  cited from the decision of the Supreme Court of Canada in Shell Canada Ltd. v. Canada (1999), where that court opined as follows:

"... this Court has made it clear in more recent decisions that, absent a specific provision to the contrary, it is not the courts' role to prevent taxpayers from relying on the sophisticated structure of their transactions, arranged in such a way that the particular provisions of the Act are met, on the basis that it would be inequitable to those taxpayers who have not chosen to structure their transactions that way. ... Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done, and certainl y not based on what a less sophisticated taxpayer might have done.

Inquiring into the "economic realities" of a particular situation, instead of simply applying clear and unambiguous provisions of the Act to the taxpayer's legal transactions, has an unfortunate practical effect. This approach wrongly invites a rule that where there are two ways to structure a transaction with the same economic effect, the court must have regard only to the one without tax advantages. With respect, this approach fails to give appropriate weight to the jurisprude nce of this Court providing that, in the absence of a specific statutory bar to the contrary, taxpayers are entitled to structure their affairs in a manner that reduces the tax payable: "... An unrestricted application of an "economic effects" approach does indirectly what this Court has consistent ly held Parliament did not intend the Act to do directly."

The Expert Testimony

In addressing the ‎regulation by the Bank, the expert witnesses, Sir Trevor Carmichael, Q.C. and Ms. Mary Mahabir, Q.C., testified that in the course of their law practices in Barbados they had regular contact with the  Bank over a period of decades.  Owen J. opined that the Bank was a model regulator as the evidence established that  it does not relinquish sensitive details regarding its licensees on  a mere request of a lawyer from the Canadian Department of Justice but rather shared such information with senior attorneys with whom it has a sound relationship characterised by trust and longevity, as in the case of the two expert witnesses of the appellant,  and this was  considered appropriate and laudable.

The expert evidence was significant in establishing the substance of the regulatory regime and the status of CCG as a regulated entity.  This aspect of the case was raised because the Department of Justice's lawyers took the unusual step of challenging the evidence of CCG having the status of a licensed entity, going so far as to try to exclude written evidence to that effect. That type of approach did not impress the Court.

The Court noted the form of regulation, the conduct of audits, the requirements for filings under the law and the compliance by the local entity CCG which were, in Justice Owen's words "both enforced and satisfied".


The decision of the Tax Court of Canada may be appealed to the Federal Court of Canada, so the outcome of this dispute remains unclear at this point.  Nevertheless, it is a welcome sign to see quality legal analysis that strikes an appropriate balance between the text, context and purpose of the law and the taxpayer's right to arrange his or her affairs within the confines of the law.

Recent amendments to Canada's FAPI rules and such court challenges, as well as broader international developments, have created concerns in the sector, so it is quite positive that Canadian courts apply such high standards of quality.

The significance of this judgment:

Justice Owen's erudite decision has not only acknowledged the legitimacy of the Central Bank of Barbados as a sound regulator but has appropriately recognized the taxpayer's right to engage in tax structuring within the confines of the law. His insightful and analytical dissection of the relevant sections of the Canadian Income Tax Act is indicative of his thorough understanding of the proper application of the statute and his respect for the law and for the sovereignty of Barbados."

Sadie Dixon is the Legal Counsel of the Central Bank of Barbados.  She is a member of the Joint Policy Working Group on International Business and Investment Promotion (JPWG), and the Central Bank's International Business and Financial Services Committee.

"With this decision, Owen J. has set a standard for statutory interpretation that will be very difficult to exceed." 

Angelo Nikolakakis is an international tax lawyer based in Montreal, and provides services to Ernst & Young LLP. He has spoken and written on numerous occasions on various topics of corporate and international tax law.

Written by Andrew Thornhill, Attorney at law, 

George Walton Payne & Co.

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.

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