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The Best Canada Can Give: Saskatchewan Upgrades Its Film Tax Credit

In January 2006, Saskatchewan implemented the most recent revisions to its Film Employment Tax Credit.  The tax credit now permits producers to claim up to 45% of qualified labour costs for a production shot within the provinces borders.  The previous credit was limited to 35%.  The producer may also claim another five percent of eligible labour costs for films shot beyond 40 kilometers outside of Saskatchewan or Regina.  In addition, producers can receive a five percent bonus on productions valued at $3 million or more, if at least six key-crew positions go to Saskatchewan residents.  With the new increase in Saskatchewan’s tax credits, it is considered to be on of the richest film tax incentives in Canada. 

Although Saskatchewan has not seen an immediate shift in production levels since increasing the tax credit, the government and industry observers anticipate that there will be a significant growth in this prairie province over the next year.  In fact, SaskFilm, the organization responsible for administering the tax credit and providing financial assistance to qualified production companies for purposes of developing a production, reports that inquiries about filming in the province has more than doubled since the change to the credit was announced in November.

Some industry commentators, although pleased with the increase, are concerned that the labour pool will be insufficient to support a surge in production if the change comes about too quickly.  In order to address this concern, the government is discussing the option of introducing a training program specifically focussed on growing the available talent pool.  No definitive announcement has been made about how this program will work. 

Provided the Saskatchewan film industry can meet the demands of expanded productions within its borders, it is likely that the increased credit will allow the province to compete for bigger blockbuster productions which will rival that of Ontario’s.  This could potentially be the beginning of a domino effect of increasing film tax incentives across Canada.  However, at this stage it is too soon to tell how this change will affect the rest of the provinces.  Ontario and other provinces will just have to keep their ears tuned in to any market shifts and a finger on the government lobbying speed dial line.

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Eligible Capital Amount: The Mirror Image Test

First published by the Canadian Tax Foundation in (2003) Vol. 51, No. 2 Canadian Tax Journal

The Queen v. Toronto Refiners and Smelters Limited considered the meaning of “eligible capital amount” for the purposes of subsection 14(5) of the Income Tax Act.[i] The taxpayer, Toronto Refiners and Smelters Limited (“Refiners”), had received $9 million as damages because it could not relocate its business after surrendering its property to the city of Toronto. The issue addressed by the court was whether the payment was an eligible capital amount or a non-taxable capital receipt.

The definition of “eligible capital amount” requires that the taxpayer be put into the position of a payer in order to determine whether a payment received by the taxpayer is an “eligible capital amount”.  The language in the definition suggests that the question the court should have asked was: Had Refiners purchased the property transferred to the city in exchange for the $9 million, would any payment made by Refiners have been an “eligible capital expenditure”? This is not the approach adopted by either the Tax Court or the Federal Court of Appeal.

Refiners carried on a secondary lead-refining business in Toronto on land and in buildings that it owned. Apparently, the city wanted to purchase the real property because it had pollution- and noxious use-related concerns about Refiners' use of the property. For several years, Refiners and the city negotiated unsuccessfully about the sale of the real property conditional on Refiners’ being able to relocate its business. In 1988, Refiners entered into an agreement to transfer its real property to the city. Under this agreement, which was made in accordance with section 31of the provincial Expropriations Act,[ii] Refiners consented to the acquisition of theproperty by the city under the following terms:

  • the transfer was not conditional on Refiners' being able to relocate its business;

  • the city and Refiners agreed that the other party could apply to the Ontario Municipal Board (OMB) under section 31 of the Expropriations Act for an assessment of the compensation that Refiners would have been entitled to receive had the city expropriated the property;

  • if Refiners did not relocate its business, the city agreed to acknowledge in all future proceedings that such a relocation was not feasible;

  • Refiners could recover inventory, equipment, and chattels located on the property and dispose of it on its own account; and

  • if Refiners claimed compensation for the loss of its business, it would disclose the proceeds from the sale of the inventory, equipment, and chattels, and these amounts would be taken into account in the calculation of its compensation entitlement.

In this connection, it should be noted that section 13 of the Expropriations Act provides that the compensation payable by the statutory authority is based on the market value of the expropriated land, damages attributable to “disturbance” and injurious affection, and “any special difficulties in relocation”. Section 19 of the Expropriations Act provides that compensation may also include an amount not exceeding the value of the goodwill of a business that it is not feasible for the owner of the business to relocate.

On February 20, 1989, Refiners transferred vacant possession of its land and buildings to the city after it had disposed of most of its other assets located on the property. The city made an initial payment of $1 million to cover Refiners’ legal, appraisal, and other costs. Refiners did not relocate its business and in 1989 applied to the OMB for a determination of the compensation it should receive under the agreement. The valuators retained by Refiners and the city for the purposes of the OMB hearing valued the goodwill of the business at between $3.85 million and $8 million. The property was valued at between $1 million and $6.8 million.

After the hearing started but before the OMB made a determination, the parties entered into, and die OMB approved, a settlement. Under the settlement, dated January 27,1992, the city agreed to pay Refiners

  • $2.9 million for the land,

  • $ 100,000 for the buildings, and

  • $9 million for damages arising from Refiners' inability to relocate its business.

Refiners included the $9 million of damages it received in its income for financial statement purposes in 1992. For tax purposes, however, it did not include the $9 million in income, claiming that it was a non-taxable capital receipt. The minister reassessed Refiners on the basis that three-quarters of the $9 million was an “eligible capital amount” and should be treated as a capital gain. Refiners appealed. “Eligible capital amount” is defined in subsection 14(1) of the Act, by reference to the definition of “cumulative eligible capital” in subsection 14(5), as

an amount which, as a result of a disposition ..., the taxpayer has or may become entitled to receive, in respect of the business carried on or formerly carried on by the taxpayer where the consideration given by the taxpayer therefor was such that, if any payment had been made by the taxpayer after 1971 for that consideration, the payment would have been an eligible capital expenditure of the taxpayer in respect of the business.

Historically, courts applying this definition have adopted the “mirror image” rule; that is, they have looked to the payer's position when determining whether a payment received by a taxpayer should be treated as an eligible capital amount.[iii] In the Tax Court decision in Toronto Refiners, Bell TCCJ embraced this approach, stating that “the actual payer's circumstances must be taken into account” to establish whether “the payment of damages ... [was] an eligible capital expenditure within the definition” in subsection 14(5).[iv] In other words, whether an amount received by a taxpayer is an eligible capital amount depends on the particular circumstances of the payer. Accordingly, in Toronto Refiners, the pivotal question was whether the payment was an eligible capital expenditure for the city.

In Toronto Refiners, the city acquired the property in the public interest and in accordance with section 31 of the Expropriations Act, which essentially required the city to fully compensate the taxpayer for its property, including any losses occasioned by the termination of its business. This section must be read in conjunction with the definition of “eligible capital expenditure” in subsection 14(5) of the Act, which provides that an expense incurred to acquire intangible non-depreciable property will generally constitute an eligible capital expenditure provided that the property is acquired for a business purpose.

After reviewing section 31 of the Expropriations Act and the parties’ agreement, the Tax Court found that the $9 million payment was not an eligible capital expenditure because it was not made by the city on account of capital for the purpose of gaining or producing income from a business. The city had entered into the agreement with Refiners, under its statutory authority derived from the Expropriations Act, to facilitate the city's purchase of Refiners' land and buildings and to provide for the payment of damages by the city if the taxpayer was unable to relocate its business. The evidence indicated that the payment by the city was not incurred for a business purpose, and the Crown conceded this point.

Moreover, the court decided that the $9 million damage payment by the city to Refiners must be regarded from the city's perspective as part of the cost of the real property acquired from the taxpayer and on this basis could not be characterized as an “eligible capital expenditure”.

The Crown appealed the decision of the Tax Court to the Federal Court of Appeal. In her judgment, Madam Justice Sharlow closely examined the language in the definition of “eligible capital amount”. After determining that the $9 million payment made by the city had been received by Refiners in respect of the business it had formerly carried on, Madam Justice Sharlow continued her analysis by reviewing the nature of the consideration given by Refiners for the payment. She found that Refiners’ agreement to release the city from any further claims for compensation under the Expropriations Act was the consideration referred to in section 14. She then applied the mirror image rule to characterize the payment.

In applying the mirror image rule, Madam Justice Sharlow placed Refiners notionally in the position of the city. She stated that the circumstances of this hypothetical payment would have to be the same as the circumstances of the actual payment. Essentially, this meant that the hypothetical payment by Refiners would be made for the same reasons that the city made the payment: that is, statutory compensation related to property expropriated for a civic purpose. Although the court initially appeared to be considering the nature of the payment from Refiners' perspective, it was the city's perspective that determined the final characterization of the payment. As a result, Madam Justice Sharlow concluded that the payment would not have been characterized as an eligible capital expenditure had Refiners made the payment for the same consideration, because it would have been made for a civic, non-commercial purpose and not for a business purpose.

Since goodwill is not capital property and cannot be subject to capital gains, the court decided that the correct result, under the circumstances, was that the amount was non-taxable.

In light of the existing case law, the judgment in this case was predictable. Clearly, the Expropriations Act and lack of a business purpose for the transfer were critical to the result in both the Tax Court and the Federal Court of Appeal. In this case, the tax consequences of the transaction to Refiners were dependent on the unique character of the payer of the damages (that is, the city). Had Refiners sold its property to a competitor that had shut down or moved the business, the portion of the purchase price that related to the goodwill of the business would have been an “eligible capital amount”.

From a policy perspective, this case is disturbing. Taxpayers who, for any reason, dispose of non-depreciable capital property, such as goodwill, should be treated in the same way as taxpayers who dispose of depreciable capital property. The tax consequences of the disposition should depend on the character of the asset to the taxpayer, not the purchaser.

As pointed out above, it appears to be possible to interpret the definition of “eligible capital amount” in a manner that produces more consistent results. Specifically, instead of determining the character of the payment in question in the hands of the actual payer, as the court did in the Toronto Refiners case, the court should employ the literal interpretation of the section, which seems to require that the character of the payment be determined on the basis of whether the taxpayer made the payment for the same consideration. However, given the existing jurisprudence, it appears that only an amendment to the definition of “eligible capital amount” would eliminate the possibility of inconsistent results that characterizes the current interpretive approach and bring the treatment of eligible capital property in line with the treatment of capital property.

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[i] RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”).  Unless otherwise stated, statutory references in this feature are to the Act.

[ii] RSO 1980, c. 148 (for the purposes of this case).

[iii] In The Queen v. Goodwin Johnson (196) Ltd., 86 DTC 6185; [1986] 1 CTC 448 (FCA), the taxpayer received damaged for compensation for the loss of a business caused by the termination of an agreement.  The Federal Court put taxpayer in the notional position of the party making the damage payment to determine whether the payment was an eligible capital amount.  The court concluded that the payment did not represent an eligible capital amount because the expenditure was made for the purpose of gaining or producing income.  Also see Pe Ben Industries Company v. The Queen, 88 DTC 6347; [1998] 2 CTC 120 (FCTD).

[iv] 2001 DTC 876; [2001] 4 CTC 2818, at paragraph (TCC).

Deducting Something from Nothing: Paragraphs 80(h) and (i)

First published by the Canadian Tax Foundation in (2005) Vol. 53, No.1 Canadian Tax Journal

In Williams v. The Queen, the Tax Court of Canada addressed the question of whether it was appropriate for the taxpayer to deduct certain employment expenses pursuant to paragraphs 8(1)(h) and (i) of the Income Tax Act in circumstances where the employer paid the expenses and the taxpayer, although obligated, had not yet reimbursed the employer.

The taxpayer, Tom Williams, was employed by a securities brokerage firm as a senior technology analyst in 1997 and 1998.  He was responsible for performing due diligence and selling large‑scale high‑tech securities offerings.  There was no written employment agreement.  Instead, Mr. Williams entered into a verbal agreement with his employer that he would be remunerated on a commission basis.  As part of the agreement, he was able to take regular monthly draws as advances against anticipated commissions.  All draws and other advances were treated as employment income paid to Mr. Williams.  He was provided with T4 statements that included these amounts.

In performing his duties, Mr. Williams was required to travel extensively in Canada and the United States.  He was responsible for paying his own travel expenses and the payment of a salary to his sales assistant.  These expenses were necessary for him to arrange and negotiate transactions for his employer.  Although he was not specifically required by the terms of his contract of employment to hire a sales assistant, it was not possible for him to perform his duties without one.  Mr. Williams did not receive an allowance and was not reimbursed or entitled to reimbursement for any of his expenses.  However, the employer paid the expenses on his behalf.  and the amounts paid were treated as a debt owing to it by him.  The employer expected to recover these payments from future commissions earned by Mr. Williams.

In 1998, Mr. Williams ceased his employment with the company.  None of the transactions were completed, and he earned no commissions.[i]  However, he did receive amounts in the form of monthly draws and other advances against commissions.  Pursuant to an agreement with his employer, he was required to repay the advances when he left the company.  However, Mr. Williams did not repay any of the money he received.  In filing his 1997 and 1998 income tax returns, he included the advances as income and claimed the expenses as deductions for those taxation years.  The minister reassessed the returns and denied the deduction of the expenses.

The minister argued that Mr. Williams did not pay any expenses in the year and, as a result, was not entitled to a deduction under paragraph 8(1)(h), (i), or (f).  The minister’s position was that because Mr. Williams did not repay the amounts advanced by his employer, the expenses were not paid by him.  The minister also argued that Mr. Williams was not entitled to deduct the expenses under paragraph 8(1)(f) because he only received advances on account of future commissions, and no actual commissions were earned.  In his argument, Mr. Williams relied on paragraphs 8(1)(h) and (i).  Paragraph 8(1)(f) was presented as an alternative argument.  The court did not address this provision because the matter was disposed of on the basis of the applicability of the other two provisions.

Pursuant to paragraph 8(1)(h), under certain conditions, a taxpayer may deduct reasonable amounts expended for travelling in the course of employment.  The taxpayer is entitled to a deduction under this provision only if the amount expended was incurred to carry on employment duties away from the employer’s place of business.  The taxpayer must not have received an allowance for these expenditures[ii] and must not claim a deduction under certain other provisions.[iii]  In addition, the taxpayer must be required to pay these amounts under a contract of employment.  In circumstances where all the conditions have been met, courts will disallow deductions under this provision if there is no requirement for the taxpayer to incur these expenses by virtue of his or her employment.[iv]

In this case, Mr. Williams met all the conditions.  However, at issue was whether the amounts were expended by him or by the employer.  A similar issue arose in Nissim v. The Queen,[v] a decision of the Tax Court of Canada, where the taxpayer relied on the Ontario Legal Aid Plan (OLAP) to cover legal expenses.  The taxpayer later attempted to deduct the legal expenses paid by OLAP on the tax return for the relevant year.  The minister denied the claim.  At trial, Justice Bowman found that although the taxpayer did not pay the amount directly, the legal expense was deductible.  The court stated that since the taxpayer had a very real and immediate liability to OLAP to repay the legal costs, the cost should be deductible.[vi]

It was clear that Mr. Williams was responsible for his own travel expenses and did not receive an allowance for those expenses.  He was also not reimbursed or entitled to reimbursement.  However, the fact that the employer paid the expenses on his behalf (notwithstanding that the expenses were treated as debt owing to the employer) appeared to trouble the minister.  Justice Miller found that each time the employer paid Mr. Williams’s expenses, it was his money that was being spent.  Also, the court found that under the agreement, it was clear that the employer expected to recoup the payments from future commissions.  On the basis of this evidence, the court found that an immediate and absolute liability existed and, therefore, that Mr. Williams had made these payments.  The court stated:

It is not the exchange of physical cash or whose credit card was used to pay that determines who expended the money, but it is the legal relationships that are in play which must be examined... .

[The taxpayer] was obliged to reimburse [his employer] on a demand basis...  .  This is more than simply an employee advance only to be recouped from subsequent earnings.  It was more in the nature of a demand loan....  I find that [the taxpayer] effectively made these payments.[vii]

Clearly, one of the factors that motivated the minister in making the reassessment was the fact that Mr. Williams had never repaid the debt to his employer.  However, as Justice Miller points out in his decision, that situation is addressed by subsection 6(15) of the Act, which provides that a debt to an employer that is not repaid must be included in income as a taxable benefit.  In the context of deductibility pursuant to paragraph 8(1)(h), provided that an employee has a genuine liability to repay expenses paid on his or her behalf by the employer, the employee will be entitled to a deduction for expenses, even where the employee has not repaid those amounts.  The court was correct in finding that the amounts expended by the employer were monies expended by the taxpayer, since the taxpayer had a genuine liability to repay those amounts.  As a result, the appropriate treatment of the unpaid amounts should not be to deny the deduction, but to include it in the calculation of the taxpayer’s income.

Mr. Williams also incurred expenses to hire a sales assistant.  Subparagraph 8(l)(i)(ii) provides that an employee may deduct an amount on account of payment of a salary to an assistant, to the extent that the employee has not been reimbursed and is not entitled to reimbursement for the payment.  In addition, the payment must be required under the contract of employment between the employer and the taxpayer.  The leading case on this issue is Cival.[viii]  In Cival, the trial judge concluded that the taxpayer was required under his contract of employment to pay the travel expenses that he incurred in the performance of his employment duties.  The Federal Court of Appeal disagreed with this conclusion.  The Federal Court held that Mr. Cival was not contractually bound to use his car in doing his job and to pay the expenses incurred.  If he had refused to use his car for this purpose, his employer would not have had a cause of action for breach of contract.  As a result, the courts found that Mr. Cival was not required under the contract of employment to pay the expenses he incurred in using his car in the performance of his employment duties, and therefore could not deduct the expense.

In Slawson v. MNR,[ix] Justice Sarchuk indicated that certain expenses are deductible by a taxpayer where they are incurred in connection with the selling of property for his employer and where, under the contract of employment, the employee was required to pay his own expenses.  The court stated that the evidence must lead to a conclusion that the taxpayer was required by the contract of employment to pay certain expenses he incurred.  Although Justice Sarchuk found that the taxpayer may have been expected to do many of the things that led to his incurring these expenses, on the basis of the evidence he concluded that the taxpayer was not required by his contract of employment to do so.  In his judgment, Justice Sarchuk stated:

I cannot equate the expectations of the employer as described by both [the taxpayer] and by [the employer] to a contractual requirement imposed upon [the taxpayer], breach of which would have given a cause of action to the employer against him.[x]

Further, the courts have held that for a deduction to be claimed under subparagraph 8(1)(i)(ii), a written employment agreement is not necessary.[xi]

The court distinguished Williams from Civil and Slawson.  In Williams, the parties agreed that Mr. Williams could not perform his employment duties without a sales assistant and that it was his responsibility to pay the assistant.  This evidence was sufficient for the court to conclude that hiring an assistant was an implied term of the contract.  In addition, the court found that Mr. Williams was responsible for this expenditure because his employer had loaned him money to cover this expense; therefore, he was entitled to a deduction.  This decision reinforces the principle under paragraph 8(1)(i) that a taxpayer will be entitled to deduct expenses incurred to pay an assistant even though the terms of the employment contract may not specifically refer to the expense, provided that the taxpayer is required to pay the expense as an implied term of the contract.  The court was correct in allowing the deduction.

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[i]  For the purposes of a discussion of paragraph 8(1)(h), it is irrelevant whether the taxpayer earned any commission.  This is not one of the tests for deductibility under this provision.  Only paragraph 8(1)(f) restricts the amount of expenses that can be claimed against the amount of commissions earned.

[ii]  The employee cannot be in receipt of an allowance for travel expenses that was excluded from income by virtue of subparagraph 6(l)(b)(v), (vi), or (vii) if the employee wants to take advantage of the deduction under paragraph 8(1)(h).

[iii]  In particular, the taxpayer must not claim a deduction under paragraph 8(1)(f) (salesperson’s expenses).  This was not in issue in this case.

[iv]  The Queen v. Cival, 83 DTC 5168; [1983] CTC 153 (FCA).

[v]  [1999] 1 CTC 2119 (TCC).

[vi] The result was different in Ryan v. The Queen, [2000] 2 CTC 2329 (TCC).  The court found that no absolute liability existed to OLAP for the payment of legal expenses when the taxpayer did not pay the expense in the taxation year in question.  The court did not allow the deduction in this case.

[vii]  2004 DTC 3549, at paragraphs 14 and 16 (TCC).

[viii]  Supra note 4.

[ix]  85 DTC 63; [1985] 1 CTC 2075 (TCC).  See also The Queen v. Gilling, 90 DTC 6274; [1990] 1 CTC 392 (FCTD).

[x]  Slawson, supra note 9, at 64; 2077.

[xi]  Bryant v. MNR, 80 DTC 1428; [1980] CTC 2529 (TRB).  Also, in Tkachuk v. MNR, 78 DTC 1830; [1978] CTC 3114 (TRB), the board stated that the words "under the contract of employment" do not require the existence of a written employment contract, nor does the requirement of payment have to be discussed explicitly between the employee and his employer.  If the facts support the existence of such a condition in the contract, subparagraph 8(1)(i)(ii) is satisfied.

Lowest Corporate Tax Rates Worldwide

Canada currently has a marginal corporate tax rate of 35.6%.  It is lower than our US partner which applies a 39.3% tax on corporations, but still not competitive enough to discourage multi-national corporations from relocating parts of their operations abroad to lower tax jurisdictions.  Although a corporation’s marginal tax rate is not the only factor considered when deciding where to locate a foreign entity, it can be very influential if the jurisdiction of interest has a stable political and commercial environment.  To assess the actual tax benefits associated with conducting business in a particular jurisdiction it is insufficient to simply compare tax rates.  A review of the deduction, credit, and profit computation rules are essential in calculating potential tax liability.

Below is a list of the lowest tax rates as of January 1, 2004 as reported in “KPMG’s Corporate Tax Rate Survey – January 2004”.  At the time this report was published, there was evidence of a global trend to lowering corporate tax rates.  Presumably, the lower rates were a result of the desire to be more competitive internationally.   


2004 Tax Rate











Hong Kong














It is likely that over the next few years this trend will continue.  More countries are aware that an increasing amount of multi-national companies are locating holding companies in low tax foreign jurisdictions, which creates opportunities to market tax savings as a way to attract new businesses within a countries borders.  This trend is not limited to smaller centers.  In fact, both the Canadian and United States governments have prepared studies that advocate for decreasing corporate tax rates in order to retain some of the multi-national businesses within its borders as opposed to using domestic rules that permit tax credits and deductions for foreign generated income.  Proponents for this approach argue that such a system would better meet the government’s goal of transparency.  It is not clear whether the proposal for a more competitive corporate rate will be implemented any time soon in Canada.  However, the government does currently recognize the right of multi-national businesses to structure their affairs to take advantage of low tax jurisdictions when deciding the best place to operate certain functions of their business, within certain limitations.  For example, multi-nationals should be aware of the Canada Revenue Agency’s new policy on Aggressive International Tax Planning and various anti-avoidance provisions in the Canadian Income Tax Act that could potentially limit the implementation of any tax saving structure or expose the company to penalties on already implemented structures.

In our global economy, a multi-national corporation that does not take advantage of potential tax savings associated with establishing a permanent establishment or residency in another jurisdiction may lose their competitive advantage and, maybe, their business.  Despite the limitations imposed under the new CRA policy, given that the government policy is to support foreign investments, at the very least, since the potential savings could be substantial it is worthwhile exploring the opportunities.   

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Tax Incentives for Doing Business In Trinidad and Tobago

Trinidad and Tobago is well known for its yearly carnival and its beautiful landscape and soothing climate.  But in the corporate world, it is also known as a place where the government recognizes the need to provide incentives to encourage investment within its borders.  Trinidad and Tobago currently applies a basic 30% corporate tax rate, unless otherwise provided under the governing legislation.  In addition, the Government offers numerous tax incentives that are available for companies interested in expanding to the island of Soca Music.  The key incentives as outlined by PricewaterhouseCoopers Peter Inglefield in “Corporate Taxes 2004-2005:  Worldwide Summaries” are as follows:

(i)                 Fiscal Incentives Act, 1979:  A locally incorporated resident corporation, may be granted an exemption from corporation tax for a period of up to ten years, depending on the category under which it is approved.  The company can receive a total or partial exemption.  Where a company has been approved for exemption from corporate tax, it can distribute profits to resident shareholders tax-free.  Certain non-resident shareholders may also be eligible to receive profit distributions tax-free as well.  Special loss carry forward rules will apply for the period in which the exemption applied.

(ii)                Approved Tourism Projects:  Approved tourism development projects may also be eligible for an exemption from corporate tax for up to seven years.  Projects that would normally be eligible for this benefit would include hotels.  Special loss carry forward rules will apply during the period in which the exemption applied.

(iii)              Approved Mortgage and Other Companies:  Where a company has been approved for exemption from corporate tax under this provision, profits earned during the tax holiday period will be exempt from corporation tax and income tax when distributed to shareholders.

(iv)              Business Expansion Scheme:  This incentive provides a fifteen percent tax credit for small companies carrying on a business in regional development area and companies carrying out certain approved activities.  The incentive is based on their chargeable profit. 

(v)               Construction Companies:  Companies claim 10% wear-and-tear allowance on new construction projects commencing after the 1994 fiscal year.  No special exemptions from corporate or income tax apply in this situation.

Ensure that you contact local tax professionals before commencing any activity in Trinidad and Tobago if you are considering expanding your current enterprise or starting any of the above businesses.  This will help to ensure that if you meet the qualifications for these incentives you will be in a position to take full advantage of them.

If you require additional information, the US Embassy publishes a guide called, "Doing Business In Trinidad and Tobago" that is useful in determining the risks and rewards and benefits and disadvantages of conducting business in Trinidad and Tobago.  The guide also provides references to local professionals like lawyers, accountants and market researchers that can provide assistance with establishing your business there. The Investment Division of the Tourism and Industrial Development Company of Trinidad and Tobago Ltd. also provides useful information about tax incentives for local businesses.

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Comfort Provided for ITA 85.1(5) Share for Share Transfers Between Foreign Corporations

Subsection 85.1(5) of the Income Tax Act (Canada) provides a tax-free rollover of shares where the transferee issues shares to the transferor as long as the exchanged foreign shares are capital property to the transferor.  A recently introduced provision will now restrict the application of 85.1(5) in the following situations:

(i)                 where the transferor and transferee are not dealing at arm’s length immediately before the exchange,

(ii)                where the transferor controls the transferee immediately after the exchange, or

(iii)              where non-share consideration is received.

The CRA provided for further possible amendments to this provision in a Comfort Letter dated December 16, 2005.  The comfort letter was written in response to a review of a transaction involving a corporate reorganization of a widely held foreign corporation that is listed on a prescribed stock exchange.  The reorganization required that Canadian shareholders exchange their shares of two foreign corporations in the same corporate group.  The taxpayer’s concern was that 85.1(5) required that the foreign purchaser corporation “issue” its shares to the vendor shareholder in exchange for shares of another foreign corporation.  Since the shareholder in this case was not “issued” shares but simply acquired them as a result of the exchange, they would not be entitled to the rollover provided under this provision.  The taxpayer was concerned that this result was not consistent with the intention of the provision and therefore the provision should be amended to account for these types of transactions.  The CRA agreed and accordingly, recommended that the provision should be amended by replacing the “issuance” requirement with a requirement that the shareholder “acquire” the shares of a foreign purchaser corporation.  The recommendation is effective for transactions occurring after July 1, 2005.

While every amendment to the Act, presumably, will either clarify outstanding issues that cause confusion about the application of a certain provision or ensure that the policy rationale behind that provision is reflected in its application, it also makes the already complicated piece of legislation governing foreign business activities more complicated.  Hopefully, the benefits of introducing these new amendments will outweigh the disadvantages associated with maneuvering through the ever-changing rules governing foreign business activities of Canadian corporate taxpayers.

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