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Canada - BVI tax treaty is now in force

Thursday, 20 March, 2014

The Canada-BVI tax information exchange agreement signed last May came into force on 11 March, introducing a very favourable tax regime for income remitted from BVI-resident companies to their Canadian parent. BVI companies are widely used in Canada for tax planning, partly because of the BVI's zero corporate tax rate. Also, the BVI does not charge any capital gains tax, stamp duty or withholding tax.

The significance of the new agreement, according to law firm Appleby, is that the BVI now qualifies as a 'designated treaty country' under the 2007 Canadian federal budget legislation. This means the active business income of a BVI-resident company is eligible for tax-free dividend repatriation to a Canadian parent as 'exempt surplus'. To qualify as resident, the foreign affiliate must meet the common-law 'mind and management' test used by current Canadian tax policy.

The exempt surplus concession also applies to passive business income (such as interest) received by the Canadian firm from a foreign affiliate that is resident in a TIEA jurisdiction and is carrying on an active business there.