Tax Planning for Canadians
Despite restrictions imposed by Canadian income tax law on the use of tax havens, there are many circumstances in which The Bahamas retains its attractiveness for Canadians. The islands continue to prove a sound and durable base from which to
invest in Canada or the outside world or from which to conduct offshore operations
for the benefit of Canadians. In fact, increased investment outside Canada, exports by Canadian firms and the
growing number of multinational families have increased the scope for The Bahamas as a centre for international activity.
Residence In Canada, residence remains the foundation of direct taxation for individuals. This benefits Canadians wishing to take advantage of The Bahamas, especially as compared to the US, which taxes on a citizenship basis. Under the Canadian federal income tax system, individuals resident in Canada are taxed on their worldwide income whereas non-resident individuals are taxed only
through the withholding tax regime on certain investment income, with respect to income from employment in Canada, a
business carried on in Canada and from gains realized on the disposition of taxable Canadian property.
They are not taxed with any reference to the fact that they are or are not Canadian citizens. A corporation not resident in Canada is subject to Canadian federal or provincial tax only through the withholding tax regime on certain investment income, on income from its business carried on in Canada and from gains realized on the disposition of taxable Canadian property.
Like individuals, resident corporations are taxed on their worldwide income.
Canadian companies incorporated after April 26, 1965, are automatically deemed
residents of Canada unless they are continued under the laws of another jurisdiction.
Corporate continuance is treated as reincorporation for tax purposes. Consequently,a company’s residence for Canadian income
tax purposes may be affected by a change in its corporate status.
The Canadian government has enacted an incentive to lure international shipping companies to Canada. If a company deriving
all or substantially all (ie 90%) of its revenue from an international shipping business is incorporated outside of Canada, (eg in The
Bahamas) it can establish its place of central management and control in Canada and yet be deemed a non-resident of Canada. In this way, it avoids Canadian tax on its income.
Canadian withholding tax The basic Canadian withholding tax is 25%. This applies to investment income, certain
pensions, dividends, non-arm’s-length interest, rent, certain types of royalties, income from a trust and certain other forms
of revenue paid by Canadian residents to persons abroad. This tax must be withheld from the gross payment by the payer unless
the recipient of the income resides in a country with which Canada has a tax treaty. In that event, the withholding tax may be
reduced to 15% or less, depending on the terms of the treaty. The Bahamas and Canada do not have a tax treaty. Old-age security payments under the Canada or Quebec Pension Plans are subject to withholding tax.
Special exemption from withholding tax Interest paid by a Canadian resident corporation to arm’s-length non-resident
creditors is exempt from Canadian withholding tax. The exemption is granted regardless of the currency of the loan or
interest. The interest must not be contingent upon the use of, or production from, property in Canada. Also, interest which depends in whole or in part on revenue, profit, cash flow or other similar criteria, or on dividends paid or payable on shares of a corporation,
does not qualify for the exemption. Thin capitalization provisions The “thin capitalization” provisions contained in subsections 18(4), and following, of the Income Tax Act relate to the deductibility of interest paid on money borrowed from abroad by Canadian resident corporations and trusts.
Interest payments made to non-residents who hold a substantial interest (ie 25% of the voting or equity shares) in a Canadian
company, trust or partnership or which otherwise do not deal at arm’s length with the payor, are not always entirely deductible
in computing income in Canada. They will be disallowed if the ratio of the payor’s equity capital to the debt due to such non-resident
shareholders or non-arm’s-length persons is less than 1.5:1. Bahamas benefits Despite the restrictive and wide-ranging nature of the Canadian fiscal law, The Bahamas continues to play an important part in Canadian tax planning. In particular, the use of testamentary trusts and certain inter vivos trusts can yield rewards. There are not many tax havens that offer benefits comparable to The Bahamas in terms of flexibility of corporate structure, top-quality accounting and legal services, readily available first-class financial and banking services, proximity to major world markets and good docking and harbour facilities.
The modernization and liberalization of the Bahamian company and trust law and the introduction of foundation law now provide a flexibility previously unavailable in The Bahamas. The Bahamas can offer a variety of corporate and settlement structures and
procedures that are equal to those in any other jurisdiction. A number of Canadians look to The Bahamas to conduct some of their business. Some achieve this by becoming non-residents of Canada and setting up their homes in The Bahamas.Once they do this, they suffer no income tax in Canada, except on income from employment in Canada, the profits from business done there, gains from taxable Canadian property or the 25% withholding tax on certain kinds of investment income derived from Canada.
Article By Charles C Gagnon
Source from - Bahamas Handbook
The Bahamas Investor 2019