Synopsis
Canada is an English speaking commonwealth country in which an English legal system applies.
Canada is not a tax haven and does not normally appear on the blacklist of any country so a Canadian entity is not generally perceived as a vehicle which is being set up to mitigate tax or as part of a tax plan and therefore unwanted attention from foreign tax authorities can be avoided and a Canadian entity can genrally operate freely throughout the world without attracting undue attention.
Canadian law treats all companies incorporated in Canada as resident for tax purposes and taxable on worldwide income. In addition any company, wheresoever incorporated, which is controlled and managed from Canada is also treated as Canadian tax resident and taxable on worldwide income. These facts would seem to preclude the possibility of establishing a presence in Canada without Canadian taxation but certain Canadian provinces have corporate statutes which provide for the continuation of existing foreign corporations in Canada. The continuation process is similar to registration of a branch but allows a Canadian presence to be established by a foreign company and as long as the central management and control resides outside Canada and the entity has no Canadian source income it would be deemed by the Canadian tax authorities to be neither incorporated nor managed and controlled from Canada and therefore no Canadian tax would be payable on its income.
One of the provinces within Canada which allows for the continuation of foreign companies is Alberta where extra-provincial registrations may be achieved under the Business Corporations Act.
THE TURKS & CAICOS ISLAND EXEMPT HYBRID COMPANY
For South American clients a Turks & Caicos Islands hybrid company registered in Canada can provide the ideal tax planning solution giving asset protection, estate duty advantages, income and capital gains tax advantages, confidentiality and a totally legal and compliant tax planning solution.
The term "hybrid company" is used to describe a company which is limited both by shares and by guarantee so has two classes of members:- Shareholders and Guarantee Members. The former are familiar and well understood, the latter is less so although many sporting clubs or societies are structured as companies limited by guarantee and joining members become Guarantee Members.
A Guarantee Member is elected into membership of the company by the directors on condition that the member undertakes to contribute to the debts of the company up to a certain specified maximum amount - typically a relatively nominal amount. As such a Guarantee Member holds a contingent liability, which is an obligation, and this contrasts with the position of the shareholder who holds an asset - the shares.
The rights and obligations which attach to each class of membership can be laid down in the Articles of Association of the company or by the directors in board meetings thereby keeping the terms and conditions of membership confidential. The arrangements which can be made are infinite and flexible and with skilful drafting of the different rights and obligations which attach to each class of membership structures can be created which are precisely tailored to the different needs of the client.
Hybrid companies are often used as quasi trusts particularly by persons resident in civil law countries which do not recognise trusts. Typically the company will be structured so that the shares are issued on terms that each carries one vote but no rights to dividends or to participate in the capital or income of the company in any other way. The Guarantee Memberships would be issued on terms that they carry no rights to vote but all the rights to participate in the income and capital of the company. Thus all control rests with the shareholders but all benefits flow to the Guarantee Members. The shares can be issued to professional managers, who therefore act as quasi trustees, but unlike normal shareholders they cannot receive financial benefit from holding the shares. All financial benefits flow to the Guarantee Members who are therefore in a position not unlike the beneficiaries of a classical trust structure. Also a Guarantee Member’s interest is extinguished on death so there are no succession problems, no need to obtain probate and therefore there will normally be no inheritance tax implications/estate duty and a high degree of asset protection.
The anti-avoidance legislation enacted by many onshore countries aims to tax the undistributed or untaxed profits of low tax paying companies as though those profits have been received by the shareholders. The different legislations achieve this in different ways but normally focus on the percentage of shares held or the control of the company if control is achieved otherwise than through the ownership of shares. Under the arrangements outlined above the Guarantee Members would not own shares nor have control - as professional managers act as shareholders - so it may be that this type of anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. Additionally, it will normally be the case that such a structure does not bring about any reporting requirement for the Guarantee Members so, on a practical level, unwanted attention from onshore revenue authorities is avoided.
There are a number of offshore jurisdictions in which it is possible to form hybrid companies - the structures offered by both the Isle of Man and Gibraltar have been the subject of much recent interest - but the TCI hybrid offers perhaps the most flexibility and the greatest advantages.
The Turks and Caicos Islands ("TCI") lie 575 miles south east of Miami, with the Bahamas some 30 miles to the north west. There are 8 principle inhabited islands which have an estimated population of 13,000. the seat of government and capital is Grand Turk.
The legal system is based upon English Common Law with local modifications and the Islands are governed by an Executive Council of ministers appointed from the Legislative Council of elected members presided over by a British appointed Governor. The Islands are a British Crown Colony and Britain maintains responsibility for defence and foreign affairs.
THE TURKS AND CAICOS ISLANDS EXEMPT HYBRID COMPANY
An exempt TCI company receives a certificate issued in the name of the Governor which guarantees that the company will be exempt from all forms of taxation, both in respect of its own operations and on the shares in the company, for a period of 20 years from its date of incorporation.
Companies may be incorporated with a translation of the English name appearing on the Certificate of Incorporation. The name may be represented in any foreign language or characters. Additionally, a foreign language translation of the Memorandum and Articles of Association may be officially registered alongside the English version. Thus, for example, the Certificate of Incorporation could bear both an English name and a translation of that name in Chinese characters. A Chinese character version of the Memorandum and Articles of Association could also be registered.
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Last reviewed: Wednesday, May 26, 2010
Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.
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