skills and job opportunities within Canada, Canada would need to create an attractive financial environment for international shipping operations in Canada.
2
The approach adopted by Canada was unique and differed from other strategies
considered and in use elsewhere, including the tonnage tax approach considered and
employed by various European countries and the European Union. The tonnage tax
approach typically ties fiscal alleviation or tax relief to requirements such as the
operation of vessels with a specific flag or flags or demonstrating that the effective
management of vessels is carried out within a particular jurisdiction.
3 Unlike the
tonnage tax approach, Canada did not seek to tie tax relief to Canadian flag
requirements, establish specific management locale requirements or impose vessel
ownership restrictions. In similar fashion, Canada did not attempt to establish an
international ship register aimed at competing with open registries like the Norwegian International Ship Register established in 1987. Instead, Canada adopted a
market-driven approach and sought to encourage its maritime services industry and
job creation by permitting international shipping corporations to establish and
maintain operations in Canada without being subject to Canadian corporate tax
liability. Central to this initiative was the elimination of the common law “mind
and management” test and the establishment of a tax regime, which had few, if any,
equivalents amongst developed countries. The background from which this unique
initiative sprang and the principal elements of the ensuing tax regime are described
below.
2 Background: The Common Law Setting
Generally speaking, the applicability of Canadian tax law and policy depends on
residence, regardless whether the taxpayer is an individual or a corporation. Accordingly, a corporation’s place of residence is a key consideration in determining
whether it is liable to pay Canadian tax on its world-wide income.
4 As the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) does not set out an exhaustive definition of
residence, jurisprudence, as it often does in the common law world, filled the gap in
the legislative scheme.
2 In blunt terms, Canada needed to reduce cost differentials between Canada and other jurisdictions.
3 Brooks and Hodgson (2005), pp. 152–157; European Commission (1997). The tonnage tax
approach also contemplates taxation based on notional profit calculated on the net tonnage of
ship operations not actual profit, which is generally attractive as it predictable, easily calculated and
gives rise to low levels of taxation. See again Brooks and Hodgson (2005), pp. 152–157.
4 In this regard, section 2(1) of the Income Tax Act provides that “[a]n income tax shall be paid, as
required by this Act, on the taxable income for each taxation year of every person resident in
Canada at any time in the year.” Pursuant to, inter alia, section 248 of the Income Tax Act, “person”
includes “any corporation. . . .”
458
F. M. Manolis and R. L. Bozzer
2
The approach adopted by Canada was unique and differed from other strategies
considered and in use elsewhere, including the tonnage tax approach considered and
employed by various European countries and the European Union. The tonnage tax
approach typically ties fiscal alleviation or tax relief to requirements such as the
operation of vessels with a specific flag or flags or demonstrating that the effective
management of vessels is carried out within a particular jurisdiction.
3 Unlike the
tonnage tax approach, Canada did not seek to tie tax relief to Canadian flag
requirements, establish specific management locale requirements or impose vessel
ownership restrictions. In similar fashion, Canada did not attempt to establish an
international ship register aimed at competing with open registries like the Norwegian International Ship Register established in 1987. Instead, Canada adopted a
market-driven approach and sought to encourage its maritime services industry and
job creation by permitting international shipping corporations to establish and
maintain operations in Canada without being subject to Canadian corporate tax
liability. Central to this initiative was the elimination of the common law “mind
and management” test and the establishment of a tax regime, which had few, if any,
equivalents amongst developed countries. The background from which this unique
initiative sprang and the principal elements of the ensuing tax regime are described
below.
2 Background: The Common Law Setting
Generally speaking, the applicability of Canadian tax law and policy depends on
residence, regardless whether the taxpayer is an individual or a corporation. Accordingly, a corporation’s place of residence is a key consideration in determining
whether it is liable to pay Canadian tax on its world-wide income.
4 As the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) does not set out an exhaustive definition of
residence, jurisprudence, as it often does in the common law world, filled the gap in
the legislative scheme.
2 In blunt terms, Canada needed to reduce cost differentials between Canada and other jurisdictions.
3 Brooks and Hodgson (2005), pp. 152–157; European Commission (1997). The tonnage tax
approach also contemplates taxation based on notional profit calculated on the net tonnage of
ship operations not actual profit, which is generally attractive as it predictable, easily calculated and
gives rise to low levels of taxation. See again Brooks and Hodgson (2005), pp. 152–157.
4 In this regard, section 2(1) of the Income Tax Act provides that “[a]n income tax shall be paid, as
required by this Act, on the taxable income for each taxation year of every person resident in
Canada at any time in the year.” Pursuant to, inter alia, section 248 of the Income Tax Act, “person”
includes “any corporation. . . .”
458
F. M. Manolis and R. L. Bozzer