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Decoding Article XIV(6): Can Canadians Really Reclaim Departure Tax Under the Canada–Barbados Treaty?
Opportunities for tax planning are virtually limitless. Provided your strategy aligns with both the wording and purpose of applicable Canadian tax legislation (in order to avoid a GAAR attack), it will likely withstand any challenges. Tax treaties—much like domestic tax laws—also open the door to planning opportunities and renewed prospects for minimizing tax liabilities. The Canada–Barbados Tax Treaty is no exception.
However, the Article XIV(6) of the Treaty—introduced through the protocol that amended the Canada–Barbados Tax Treaty in 20**—includes a provision that may give Canadians the mistaken impression that they can recover departure tax previously paid to Canada simply by making an election when disposing of the relevant property as Barbados residents. This article aims to clarify why that interpretation may be problematic, while remaining open to alternative perspectives.
Interpreting Article XIV(6) of the Canada–Barbados Tax Treaty: Clarifying a Misconception About Departure Tax Refunds
Canada has entered into numerous tax treaties with foreign nations on both multilateral and bilateral levels. The primary purpose of these treaties is to prevent double taxation and curb aggressive tax avoidance, including strategies that border on tax evasion. One of the countries with which Canada maintains such an agreement is Barbados.
The Canada–Barbados tax treaty, formally titled the Canada–Barbados Income Tax Agreement, was signed on January 22, 1980. Several provisions were later amended through a treaty-level instrument, the Protocol Amending the Canada–Barbados Tax Agreement, signed on November 8, 2011.
The Protocol introduced amendments to Article XIV, which addresses 'Gains from the Alienation of Property'. Specifically, Article 2 of the Protocol added a new Subparagraph (6) to the Treaty, which has led some Canadians to believe that an individual may obtain a refund of departure tax paid on capital property in Canada by making an election when disposing of that property as a resident of Barbados.
The new subparagraph reads:
"6. Where an individual who ceases to be a resident of a Contracting State, and immediately thereafter becomes a resident of the other Contracting State, is treated for the purposes of taxation in the first-mentioned State as having alienated a property (in this paragraph referred to as the 'deemed alienation') and is taxed in that State by reason thereof, the individual may elect to be treated for purposes of taxation in the other State as if the individual had, immediately before becoming a resident of that State, sold and repurchased the property for an amount equal to the lesser of its fair market value at the time of the deemed alienation and the amount the individual elects, at the time of the actual alienation of the property, to be the proceeds of disposition in the first-mentioned State in respect of the deemed alienation. However, this provision shall not apply to property any gain from which, arising immediately before the individual became a resident of that other State, may be taxed in that other State nor to immovable property situated in a third State."
There is currently no publicly available authoritative interpretation of this provision, leaving the language open to confusion and competing interpretations.
The confusion addressed in this article arises from the clause, in this above provision, stating:
"...and the amount the individual elects, at the time of the actual alienation of the property, to be the proceeds of disposition in the first-mentioned State in respect of the deemed alienation."
Some Canadians have interpreted this to mean that, when disposing of capital property in Barbados, an individual may elect an amount that will require the Canadian government to reduce the deemed proceeds of disposition previously recorded for Canadian departure-tax purposes. Under this view, Canada would then be obligated to reassess the individual's departure tax and potentially issue a refund. This interpretation is difficult to accept, as it would allow an emigrant to avoid Canadian departure tax obligations through actions taken after becoming a resident of Barbados—an outcome a Canadian court is unlikely to uphold.
A more defensible interpretation emerges when this clause is considered in its proper context—namely, the introductory wording that precedes the confusing clause in Subparagraph (6). This introductory wording makes clear that the election mechanisms apply only for the purposes of taxation in the "other State," which in this case is Barbados.
The referred introductory wording states:
"...the individual may elect to be treated for purposes of taxation in the other State as if the individual had..."
From the foregoing, it is clear that the text(s) that will follow after this introductory wordings will apply only to Barbados, and not Canada. The text that followed the introductory wording are further reproduced below:
"...immediately before becoming a resident of that State, sold and repurchased the property for an amount equal to the lesser of its fair market value at the time of the deemed alienation and the amount the individual elects, at the time of the actual alienation of the property, to be the proceeds of disposition in the first-mentioned State in respect of the deemed alienation..."
The combination of the above two excerpts of Article XIV(6) support the conclusion that this segment of the provision affects only the calculation of adjusted cost base (ACB) for Barbados'tax purposes, and does not require the Canadian government to alter deemed proceeds of disposition or refund departure tax previously assessed.
The language describes how Barbados, as the "other State," is to compute in Barbados, the ACB of the property which has been subject to deemed disposition and departure taxes in Canada. In making this calculation, the individual may elect either (i) the fair market value used for Canada's deemed disposition or (ii) a lesser amount chosen at the time of the actual disposition in Barbados. This election affects taxation in Barbados alone. It does not alter Canada's records and does not entitle the individual to a refund of departure tax paid upon emigrating.
Although electing an amount below the fair market value at which the property was deemed disposed in Canada, may result in double taxation, such an outcome arises from the individual's voluntary choice. Conversely, the individual cannot elect an amount above that fair market value because that would erode Barbados' tax base, which is unacceptable to Barbados. This result aligns more with the spirit of that provision and avoids the mischief that the alternative interpretation would create.
The version of the interpretation of Article XIV(6), which is favoured by this article, also conforms with the treaty's preamble – which states the treaty's purpose. The Preamble provides:
"The Government of Canada and the Government of Barbados, desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, have agreed as follows..."
It should also be noted that a reverse of the interpretation of Article XIV(6) favoured in this article would likewise apply when a Barbados resident emigrates to Canada.
CRA's Interpretation of Treaty Provisions that Resemble Article XIV(6) of the Canada–Barbados Treaty
Although no court has interpreted a provision that resembles Article XIV(6) of the Canada–Barbados Tax Treaty, the CRA has issued an administrative interpretation that sheds light on the issue. See 3 February 2022 Internal T.I. 2021-0922301I7.
Article XIV(6) of the Canada–Barbados Tax Treaty is undeniably a complex provision. The CRA has published an interpretation of Article XIII(7) of the Canada–U.S. Income Tax Convention, a provision that can be viewed as a simplified counterpart to Article XIV(6) of the Canada–Barbados Treaty. Unlike the Canada–Barbados provision, Article XIII(7) of the Canada–U.S. Treaty does not include the confusing clause that is being discussed in this article; but even so, the interpretation of other components of Article XIII(7) is relevant to our interpretation of Article XIV(6) of the Canada–Barbados Treaty.
Article XIII(7) of the Canada–U.S. Income Tax Convention provides:
- Where, at any time, an individual is treated for the purposes of taxation by a Contracting State as having alienated a property and is taxed in that State by reason of that treatment, the individual may elect to be treated for taxation purposes in the other Contracting State, in the year that includes that time and in all subsequent years, as if the individual had sold and repurchased the property immediately before that time for an amount equal to its fair market value at that time.
The CRA concluded that the election in this above provision applies solely to "the other State," which is the United States. As a result, the CRA determined that the U.S. Internal Revenue Service has sole jurisdiction to decide who may make this election. The CRA also characterized the election as a "'notional' sale and repurchase of U.S. property," which aligns with the argument advanced in this article that: the amount elected under Article XIV(6) of the Canada–Barbados Tax Treaty is intended to establish the adjusted cost base for taxation in Barbados, and has no real impact in reducing deemed proceeds of disposition in Canada or resulting departure taxes.
Pro Tax Tips: Why Engaging a Canadian Tax Lawyer Is Critical for Navigating Tax Law Provisions
The importance of a Canadian tax lawyer cannot be overstated, particularly when dealing with complex, novel, or high-stake provisions that could result in substantial financial loss. Article XIV(6) of the Canada–Barbados treaty is one such provision, and the absence of any publicly available authoritative interpretation only adds to the complexity.
Our top Canadian tax lawyers can help navigate this provision and, where appropriate, file applications for advance tax rulings. Such rulings compel the relevant tax authorities to provide an advance interpretation of the provision, which becomes binding should the taxpayer decide to follow that interpretation. In addition, other alternative strategies may be suggested to the taxpayer, depending on the taxpayer's specific situation.
Frequently Asked Questions (FAQs):
What misconception do some Canadians have about Article XIV(6) of the Canada–Barbados Tax Treaty?
Some Canadians mistakenly believe that Article XIV(6) allows an individual to recover departure tax previously paid to Canada by making an election when disposing of capital property as a Barbados resident. This wrong interpretation is further supported by some AI programs.
What event triggered the confusion regarding potential departure-tax refunds?
The confusion stems from the wording of the new Subparagraph (6), added by the 2011 Protocol to the Canada–Barbados Tax Treaty, particularly the clause allowing an individual to "elect" an amount at the time of actual alienation of the property.
What does Article XIV(6) actually determine in the 'Other State'?
It determines how the 'other state' should compute the adjusted cost base (ACB) of property that was subject to deemed disposition and departure tax in the 'first state'. The individual may choose either the fair market value used in the 'first state' or a lesser amount elected at the time of actual disposition in 'other state'.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
