Previously, during the 1980s and up until the 1990s, countries that handed over dividends in Canada tax-free, and received by a parent company tax-free, were called designated countries. There is a list of countries, and if anyone of those countries paid up dividends in Canada, they were exempt from paying taxes. Some of these countries had a practically zero tax rate. Therefore, shipping companies especially were created in these countries.
In her reports published throughout the 1990s, the Auditor General stated that these practices made no sense and that henceforth, Canada should favour countries with which it has tax agreements. The legislation was amended to stipulate that countries authorized to pay dividends in Canada tax-free were countries that had concluded a tax agreement with Canada.
Under section 30 of the Canada-Barbados agreement, International Business Companies, IBCs, are excluded from the tax agreement. This has created a problem, because maritime companies in particular have left certain foreign countries in order to go to Barbados. An amendment was made to regulation 5907(11.2)(c) of the Income Tax Act stipulating that even if a company was an IBC, it would also be subject to the tax agreement. Therefore, a company residing in Barbados, whose control centre is located in Barbados, and whose important decisions are made in Barbados, would henceforth be subject to the tax agreement.
From the research I conducted, the problem lies in the fact that companies located in Barbados do not necessarily make important decisions in Barbados. Professionals I met with clearly indicated to me that decisions are taken by a committee of professionals located elsewhere, abroad, or in Canada. Companies are able to repatriate dividends to Canada under subsection 5907(11.2)(c) of the regulation as is stipulated in the agreement signed before 1995, and that specifically deals with Barbados.