3 Canada’s Current Tax Regime and International
Shipping: The Principal Elements
The tax regime applicable to international shipping established under the Income Tax
Act in 1991 and by way of subsequent amendments has two principal elements. The
first element relates to the manner in which income is derived. The second element
relates to the residency and characteristics of the income earner. While the amendments introduced in 1991 were amended in 1998 and most recently in 2014, the core
and essential aspects of the regime have remained consistent and intact since 1991,
that is, corporations incorporated outside of Canada engaged in international shipping can manage and operate their international shipping business in Canada without
being subject to Canadian taxation on their business income, including world-wide
income.
With respect to the first element, section of 81(c) of the Income Tax Act stipulates
as follows:
81(1) Amounts not included in income
. . .
There shall not be included in computing the income of a taxpayer for a taxation year,
. . .
(c) ship or aircraft of non-residents
the income for the year of a non-resident person earned in Canada from international
shipping or from the operation of aircraft in international traffic, if the country in which the
person is resident grants substantially similar relief for the year to persons resident in
Canada. . . .
13
“International shipping” is defined in this context as:
. . .the operation of a ship owned or leased by a person or partnership (in this definition
referred to as the “operator”) that is used, either directly or as part of a pooling arrangement,
13 Prior to 2014, this provision read as follows:
(c) the income for the year of a non-resident person earned in Canada from the operation of a
ship or aircraft in international traffic, if the country in which the person is resident grants
substantially similar relief for the year to persons resident in Canada. . . .
The current provision and its predecessors do not appear to have received significant judicial
consideration. The only decision that appears to have addressed the provision is the decision of the
Tax Court of Canada in Sutcliffe v. R., 2005 TCC 581, 2005 CarswellNat 4241. In that case, the
respondent suggested inferentially that section 81(1)(c) of the Income Tax Act provided a commercial airline pilot a tax exemption in relation to international flights. That suggestion was rejected by
the Court in the following terms:
103. The problem with this argument is that the general legislative scheme for the taxation of
operators of ships and aircraft is not the same as the scheme for the taxation of employees
engaged in transportation. There is no one overall scheme of taxation applicable to transportation. If Parliament had intended that a similar taxation regime apply to operators and to
pilots, it would have provided for it.
This holding suggests, of course, that employees of international shipping corporations cannot
avail themselves of the same tax exemptions available to their employers.
Taxation and Ship Management: A Canadian Case Study
461
Shipping: The Principal Elements
The tax regime applicable to international shipping established under the Income Tax
Act in 1991 and by way of subsequent amendments has two principal elements. The
first element relates to the manner in which income is derived. The second element
relates to the residency and characteristics of the income earner. While the amendments introduced in 1991 were amended in 1998 and most recently in 2014, the core
and essential aspects of the regime have remained consistent and intact since 1991,
that is, corporations incorporated outside of Canada engaged in international shipping can manage and operate their international shipping business in Canada without
being subject to Canadian taxation on their business income, including world-wide
income.
With respect to the first element, section of 81(c) of the Income Tax Act stipulates
as follows:
81(1) Amounts not included in income
. . .
There shall not be included in computing the income of a taxpayer for a taxation year,
. . .
(c) ship or aircraft of non-residents
the income for the year of a non-resident person earned in Canada from international
shipping or from the operation of aircraft in international traffic, if the country in which the
person is resident grants substantially similar relief for the year to persons resident in
Canada. . . .
13
“International shipping” is defined in this context as:
. . .the operation of a ship owned or leased by a person or partnership (in this definition
referred to as the “operator”) that is used, either directly or as part of a pooling arrangement,
13 Prior to 2014, this provision read as follows:
(c) the income for the year of a non-resident person earned in Canada from the operation of a
ship or aircraft in international traffic, if the country in which the person is resident grants
substantially similar relief for the year to persons resident in Canada. . . .
The current provision and its predecessors do not appear to have received significant judicial
consideration. The only decision that appears to have addressed the provision is the decision of the
Tax Court of Canada in Sutcliffe v. R., 2005 TCC 581, 2005 CarswellNat 4241. In that case, the
respondent suggested inferentially that section 81(1)(c) of the Income Tax Act provided a commercial airline pilot a tax exemption in relation to international flights. That suggestion was rejected by
the Court in the following terms:
103. The problem with this argument is that the general legislative scheme for the taxation of
operators of ships and aircraft is not the same as the scheme for the taxation of employees
engaged in transportation. There is no one overall scheme of taxation applicable to transportation. If Parliament had intended that a similar taxation regime apply to operators and to
pilots, it would have provided for it.
This holding suggests, of course, that employees of international shipping corporations cannot
avail themselves of the same tax exemptions available to their employers.
Taxation and Ship Management: A Canadian Case Study
461