TIEAs facilitate the exchange of information relating to
taxes between the two jurisdictions that are parties to the TIEA and are
considered to be an important tool to help prevent tax evasion in circumstances
where there is not a comprehensive tax treaty writes Kevin Butler, partner,
Conyers Dill & Pearman.
The Canada-Cayman TIEA is similar to previously agreed
TIEAs and includes the standard resources required to ensure that due process
is followed when requests for tax information are received in Cayman,
including, for example, provisions to protect the confidentiality of the
information provided and adhering to public policy. It further includes
provisions relating to the protection of legal privilege, as well as ensuring
that requests from Canada are relevant to tax investigations being conducted by
Canadian authorities.
In Canada, the benefits of TIEAs are even more
pronounced. In March, 2007, Canada introduced legislation that provided
favourable tax treatment for business income repatriated from TIEA
jurisdictions and introduced negative tax consequences for the repatriation of
income from any jurisdiction that does not agree to a TIEA within 60 months of
a request from Canada. With respect to the favourable tax treatment, we
understand that actual or deemed business profits of a company based in a TIEA
jurisdiction are eligible for tax free dividend repatriation to a Canadian
parent as “exempt surplus”.
Specifically, not only is active business income earned
in the TIEA jurisdiction able to be repatriated tax free, but passive forms of
income such as interest or royalty payments paid to a company in a TIEA
jurisdiction by a sister company resident and carrying on active business in a
third jurisdiction (also being a TIEA or treaty jurisdiction) may be
repatriated on a tax free basis to the Canadian parent, so long as the amount
is deductible in computing active business income of the sister. This allows
the Canadian parent to take advantage of the neutral tax regime of the Cayman
Islands.
The signing of the Canada-Cayman TIEA provides a more
tax-effective platform for Canadian-owned groups with foreign operations.
Several Canadian companies are already significantly involved in the Cayman
Islands, specifically, in the banking, captive insurance and hedge fund areas.
The Canada-Cayman TIEA will exempt certain dividends
payable to foreign affiliates resident in the Cayman Islands and distributed to
their Canadian parent companies from relevant Canadian taxation. The agreement will make it easier for
Canadian firms to form new Cayman companies and to potentially move business to
Cayman from other double-tax treaty jurisdictions.
While Canada has had a long standing relationship with
Barbados pursuant to the Barbados - Canada tax treaty, as a result of the TIEAs
being entered into by Canada we expect Cayman to play a significantly greater
role in international structuring by Canadian companies.
Since 1980, Barbados has enjoyed the benefits of a
double-tax treaty with Canada, which has given it an advantage in establishing
financial structures for Canadian businesses. When the Canada-Cayman TIEA
becomes effective, Cayman will become a “designated treaty country” as a
consequence of the 2007 Canadian Budget.
While this designation has also been afforded to foreign affiliates in
countries who share a double-tax treaty with Canada (including Barbados),
unlike Barbados, Cayman does not impose any corporate income tax, capital gains
tax or withholding tax. Thus by establishing a Cayman subsidiary, a Canadian
corporation may benefit from the tax neutrality as well as enjoying the
sophisticated infrastructure which Cayman offers as a leading offshore
financial centre.