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Canada TIEA closer though not in effect

Canadian legislators moved closer to having all the ducks in a row to bring the Canada-Bahamas Tax Information Exchange Agreement (TIEA) into force, but that still will not happen before the Fall.

The TIEA will create opportunities for The Bahamas through provisions that would allow Canadian corporations to have subsidiaries in The Bahamas and repatriate profits back to the Canadian parent ‘tax-free’.  Signed on June 17th, Canadian legislators have since enacted amendments to that country’s excise tax laws necessary to bring the TIEA into force.

“The Excise Act and Excise Tax Act amendments were contained in Bill C-3, which received royal assent on June 26, 2011,” Partner in Deloitte Canada’s International Tax Group Sandra Slaats told Guardian Business yesterday.

The excise tax amendments are key elements necessary for implementing the TIEA, Slaats said in late June when he addressed attendees at the Bahamas Financial Services Board’s Business Seminar Series.  Those amendments would accommodate many of the key information sharing aspects of the TIEA.  But as Slaats predicted, summer came without the full enforcement.

“Before the TIEA can come into force, there must be notice of ratification by both countries.  From Canada’s perspective, this will take place in the early Fall when an order in council can be prepared,” Slaats said.

For The Bahamas’ part, Guardian Business understands that both the ratification and the notice of ratification have taken place.

Once the TIEA comes into force, it will mean that Canadian corporations will be able to set up active businesses in The Bahamas and once they meet the stringent qualifying standards and tests, take advantage of the special tax incentive.

“What the incentive is is that a subsidiary resident in a country, whether it’s a treaty or a TIEA [country], qualifies for what we call exempt surplus treatment on what we call active business income,” Slaats said in June.

“If you get exempt surplus treatment the income of a subsidiary can come back to Canada and be tax free.”

Since the 1970s Canada has offered the ‘exempt surplus’ incentive to tax treaty partners — the ‘carrot’ used to encourage countries to enter such treaties with Canada, Slaats said.  The incentive was extended to include not only tax treaty partners, but TIEA partners as well in 2008.

There are a number of uses Canadians find for the foreign affiliate (FA) – a foreign corporation owned by a Canadian company – that can qualify income for the exempt surplus category.  Slaats listed the practice of using FAs as holding companies for other FAs, in the case of The Bahamas potentially creating opportunities for resident directors and legal practitioners, for example.  FA holding companies using The Bahamas may take advantage of zero capital gains taxes here.

Inter-affiliate company financing is “very big” with Canadian companies, Slaat said, and the TIEA will create opportunities here as well.

 

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