Copyright 1996
InterAm Database
National Law Center for Inter-American Free Trade


July 20, 1992

Bahamian corporation treated as U.S. resident under U.S.A. - Canada treaty

TEXT:

The Canadian Federal Court (Trial Division) has held that a Bahamian 
corporation may qualify as a U.S. resident under the Canada - U.S.A. tax 
treaty. Under the facts of the case, a Canadian taxpayer rented barges from a 
non-resident corporation and withheld tax on the rental payments at a rate of 
10%, claiming that Article XII, Paragraph 2 of the Canada - U.S.A. treaty 
applied.  (The statutory withholding rate is 25%.) The non-resident corporation 
to whom the rental payments were made was incorporated in the Bahamas. 
Since incorporation, however, the Bahamian corporations only office and place 
of business were in the U.S.A.  For the years in question, the Bahamian 
corporation filed returns in the U.S.A. (Form 1120F, "Income Tax Return of a 
Foreign Corporation"), but, because all of its income arose from international 
shipping, under U.S. law it was exempt from U.S.  income tax. The Minister 
argued that the Canada - U.S.A. treaty did not apply because the recipient of 
the royalty was not a resident of the United States. The Federal Court (Trial 
Division) held in favour of the taxpayer.  Under Article IV, Paragraph 1 of the 
Treaty, "resident of a Contracting State" is defined as "any person who, under 
the laws of that State, is liable to tax ... by reason of his domicile, residence, 
place of management, place of incorporation or any other criterion of a similar 
nature ...". Based on the testimony of expert witnesses, the court found that 
under U.S. domestic law, a foreign corporation is liable to tax in the U.S.A. if it 
has taxable income that is effectively connected with the conduct of a U.S. trade 
or business. 

Based on its findings that the Bahamian corporations place of management and 
its trade or business was in the U.S.A., the court concluded that the crporation 
had income that was effectively connected with the U.S.A. and therefore was 
resident in the U.S.A. under Article IV, Paragraph 2 of the Treaty, regardless 
of whether it was a non-resident corporation for U.S. domestic tax purposes or 
whether it actually paid any U.S. tax.  The official citation of this case is: 
Crown Forest Industries Ltd. v. The Queen, 92 DTC 6305 (FCTD).