As an international tax lawyer, clients always ask me which jurisdiction would be best for them. The answer depends on where the client is resident, and what the client is trying to achieve.
In relation to tax planning for active businesses, probably the most popular jurisdiction for Canadians is still Barbados. The popularity of Barbados is based on the extremely low tax rate it charges corporations that operate outside of its jurisdiction, and the fact that Barbados is a treaty partner with Canada. Canada's domestic tax laws allow subsidiaries of a Canadian parent company incorporated in a treaty partner jurisdiction to “dividend profits up” to the Canadian parent without additional tax in Canada. Therefore, if the treaty partner jurisdiction (i.e. Barbados) does not levy tax on the subsidiary, then a Canadian corporation operating through such a subsidiary can avoid the bulk of Canadian corporate tax.
Barbados is unique among the majority of Canada's treaty partners in that it does not levy significant tax on certain of its corporations and trusts. However, a potential challenge on the horizon to Barbados' favoured status is Canada's proposed treatment of Tax Information Exchange Agreement (TIEA) partners. TIEA's are information exchange agreements with countries that generally do not levy income, dividend or capital gains taxes on their trusts and corporations and therefore would not have a normal tax treaty with Canada.
Canada has negotiated a number of TIEA's with traditional tax havens such as Bermuda, the Bahamas, and the Turks and Caicos Islands. As “treaty” partners, they will now be eligible for exempt surplus status similar to Barbados and therefore provide more options to corporations.
As far as holding companies go, I tend to use the Turks and Caicos Islands (TCI). It has basically all of the provisions that a volume jurisdiction like the British Virgin Islands offers, and yet, it is much more accessible to travel to. A holding company is generally the entity that manages the assets contained in either a tax or asset protection plan. As such, the client should make an effort to get to know the service providers operating that company and feel comfortable with the jurisdiction.
TCI has daily flights from Canada and anyone who has ever been to TCI knows that there is a strong Canadian presence there, which makes due diligence procedures for Canadian clients uniquely more effective.
Another Trio Worth Noting
Three other jurisdictions worth noting for Canadians are the United Arab Emirates (UAE), Nevis and the Isle of Man (IOM).
The UAE has a very favourable tax treaty with Canada that provides for a low rate of withholding tax on dividends paid from Canada to a parent company in the UAE (5%). Once received, the UAE does not levy tax on this income, nor does it apply withholding tax on secondary dividends paid out from the UAE entity to a third party outside of the UAE. This favourable treatment at three separate levels makes the UAE an attractive jurisdiction to use to incorporate a holding company for Canadian businesses. Some of my colleagues use certain European jurisdictions for this same purpose, but I find these jurisdictions more expensive and restrictive to operate in (which precludes their effectiveness for the medium-sized owner/operator).
Nevis is unique in relation to its insurance legislation. Private placement insurance is fast becoming one of the most popular plans for both tax savings and asset protection for Canadians. However, most jurisdictions offering insurance are relegated to whole life products and even so, are restrictive in the use of assets in the policy and in some cases leave the assets at risk. Unlike any other jurisdiction in the world, Nevis offers a statutory regime similar to trust company legislation that protects both the client's assets and the capital of the service provider (i.e. the insurer). This allows the insurer to be much more flexible with both the type of product that can be used in a given plan, and the management of the assets that are held in the plan.
The Isle of Man offers access into the EU, and in particular the United Kingdom, for special purposes such as the payment of Value Added Tax on a favourable basis. There is no corporate tax in IOM, which makes it attractive as a jurisdiction for a subsidiary which can register for VAT on products sourced in third party countries such as China and sold via the internet into the UK. While this particular use for the IOM favours everyone including Canadians, it is worth noting.
Picking the Right Jurisdiction
There are a number of excellent overseas jurisdictions in the world. Some of them cater to specific jurisdictions – such as the United States or the EU – while others are differentiated by client type (private client versus multinational corporate). Residency/citizenship status and planning objectives also come into play.
Regardless of the jurisdiction, equal attention must also be paid to the individual service provider that is chosen within that specific jurisdiction. Even the best jurisdiction in the world can't save someone from a crook.