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2002 December Report of the Auditor General of Canada
December 2002 Report—Chapter 11
Exhibit 11.6—Tax planning mechanisms continue to erode Canadian tax revenues
Moving capital gains to Barbados
- A Canadian subsidiary of a multinational foreign corporation owns shares in a foreign subsidiary that costs $1 billion and are worth $1.5 billion. The shares of the foreign subsidiary were transferred on a tax-free basis from the Canadian subsidiary to its Barbados subsidiary so that the tax cost of the shares to the Barbados subsidiary was $1 billion. The Barbados subsidiary then resold the shares for $1.5 billion to another Barbados subsidiary and realized a $500 million gain, but paid no tax on it. The $500 million capital gain moved from Canada to Barbados tax-free.
- A non-resident owned property that the Canada Customs and Revenue Agency determined was taxable Canadian property. If the property is sold it would result in a $750 million capital gain that would be subject to tax in Canada. The non-resident became a resident of Barbados. The property was sold but the gain may be exempt from Canadian tax under the Canada-Barbados tax treaty. The gain was not subject to tax in any other country. The Agency has been reviewing this transaction for over a year.
The $1.5 billion was then loaned to a related Netherlands company. The Netherlands company paid interest of $100 million to $200 million a year on the loan. The interest was subject to Barbados income tax at 1 to 2 percent. The Barbados subsidiary paid dividends to the Canadian company that are tax-exempt in Canada. The Canadian company reinvested the funds in the Barbados subsidiary.
Source: Canada Customs and Revenue Agency