Transactions between a corporation resident in Canada (“Canco”) and its wholly-owned subsidiary resident in Barbados (“BarbadosCo”) were not on the terms that would have prevailed between arm’s length persons. Did the five-year time limitation under Art. IX(3) of the Canada-Barbados Treaty apply to preclude Canada from assessing Canco to increase its profits pursuant to ITA s. 247(2) (a “Primary Adjustment”) given that the five year period had passed – but also being mindful that BarbadosCo was an enterprise referred to in Art. XXX(3), namely, an enterprise entitled to special benefits under one of the listed Barbados statutes (a “Special Barbados Entity”), so that Arts. VI to XXIV of the Treaty (including Art. IX) were stated to not apply to it.
In finding that the limitation period in Art. IX(3) did not apply to preclude such assessment of Canco, the Directorate indicated:
- As a result of the 2011 protocol to the Treaty, BarbadosCo now qualified as an “enterprise” of Barbados for Treaty purposes, so that the requirement in Art. IX(3), that for the limitation period in Art. IX(3) to apply, the disputed transaction must be between enterprises of a contracting state, no longer precluded the limitation period from applying.
- However, there was no indication that the two states intended to change the scope of the application of Art. IX with this change.
- Interpreting the limitation in Art. IX(3) as now precluding Canada from assessing a Primary Adjustment would imply that Art. IX(3) produced “asymmetrical outcomes,” i.e., that “Article IX(3) would only apply where the enterprise whose profits are subject to the Primary Adjustment is resident in Canada, and only Canada would be required to provide relief from Double Taxation associated with a Disputed Transaction.” In particular, the Directorate noted:
On the one hand, Canada would always be prohibited pursuant to Article IX(3) from making a Primary Adjustment beyond the Limitation Period to Canco on the basis that BarbadosCo qualifies as an enterprise of Barbados despite the fact that it is a Special Barbados Entity. Conversely, the BTA [Barbados Tax Authority] would never be prohibited from making a Primary Adjustment on the profits of BarbadosCo beyond the Limitation Period since BarbadosCo is excluded from the application of Article IX [as a Special Barbados Entity]. On the other hand, Double Taxation would never be relieved when the CRA makes a Primary Adjustment on Canco’s profits before the expiry of the Limitation Period as the BTA would never be required to make a Corresponding Adjustment under Article IX(2) [because BarbadosCo was a Special Barbados Entity].