Tax Effective Use by Canadian Online Retailers of Bermuda Operations for International Expansion - 2011 Canada-Bermuda Tax Information Exchange Agreement

by Bennett Jones LLP

E-tail Foreign Market Opportunity

The growth of online retail sales has globally outstripped the growth of all other retail channels, including during the last recession. For example, in England during 2012,1 it has been estimated that online e-tail grew by an average of 17 percent, compared to all other retail growth in England of approximately 2.1 percent during the same period. In 2012, Canadian companies sold $122 billion of goods and services over the Internet,2 and in 2012, 11 percent of Canadian firms sold their goods and services online, compared to only seven percent in 2011.3 In the U.S., there are 263 million Internet users and more than 100 million Americans regularly purchasing goods online.4 Forbes estimates that by 2017, U.S. online retail sales will reach $370 billion.5

The increased ability to shop online via mobile devices, combined with the explosion of online shopping apps, the increasing demand for retailers to expand internationally, and the dramatic improvements in the efficiency and dependability of sales fulfillment, are all contributing to the rapidly escalating growth of online retail markets globally.

The Bermuda-Canada Connection

Bermuda has an exceptional international reputation for the sophistication and reliability of its offshore company infrastructure and administration. Only a two-hour flight from New York, Bermuda is one of the leading financial service jurisdictions in the world, including enviable global insurance, re-insurance and banking sectors – all of which depend upon Bermuda's exceptional legal, accounting, communications and advanced IT infrastructure.

There is a long tradition of close political and commercial ties between Canada and Bermuda, including a long history of our common legal framework. Bermuda and Canada also follow the same accounting standards and thousands of Canadian expatriates have lived and worked in Bermuda. Many Bermudians, including many of Bermuda's Cabinet Ministers over the years, including Bermuda's current Minister of Finance, The Hon. Bob Richards, have attended Canadian universities for their undergraduate and graduate education. On July 1, 2011, that relationship between those jurisdictions became much closer when the Tax Information Exchange Agreement that Canada entered into with Bermuda came into force (the Canada-Bermuda TIEA).

Important Tax Benefits

Canadian retailers who sell their goods and services online can now utilize the Canada-Bermuda TIEA to expand their international sales into foreign markets with highly beneficial tax advantages.

Simply stated, as long as certain "foreign affiliate" rules (discussed below) are complied with, active business income accruing to a wholly owned subsidiary that is resident and carrying on an online retail business in Bermuda, as well as any dividends that such Bermudian e-tail subsidiary pays to its Canadian parent, will be free of Canadian tax.

In order to secure the exceptional tax advantages of the Canada-Bermuda TIEA, the Bermuda foreign affiliate of the Canadian retailer must carry on its business in Bermuda and have its mind, management and control located in Bermuda. As described in the hypothetical case study below, although much of any online retail business can be automated and operationally outsourced to others, certain of those activities and operations, together with the management and control of the Bermuda e-tailer by its board of directors, must be conducted in Bermuda.

Yacht Widgets E-tail Case Study

Although each company will have to consider how it will structure its Bermuda e-tail operations in a manner that satisfies Canada's applicable "foreign affiliate" local mind, management and control rules, the following hypothetical6 case study of how a Bermuda active business operation may be simply and cost-effectively structured is instructive of the surprising ease with which a Canadian online retailer might secure Canadian tax advantages to pursue its expansion into international markets:7

  1. Yacht Widgets Canada Corp. (YWC) was a successful Canadian retailer who sold a broad range of boating equipment, accessories and related goods (clothing, small boat parts, books, manuals, etc.) both from their several store locations across Canada and online. Many of its products are made in Canada and the United States, and its online sales to persons in the U.S. began to increase through both word of mouth and recent articles about YWC's products that had appeared in several U.S. boating journals.
  2. YWC decided that there were tremendous online sales growth opportunities in the U.S. market, but before they began their advertising campaign into the U.S. market YWC wanted to be sure that it structured its expansion into that much larger and lucrative market to maximize its financial return, including the minimization of its Canadian income tax exposure on those profits.
  3. Taking the Canada-Bermuda TIEA into account, YWC incorporated a Bermuda limited liability company, Yacht Widgets Bermuda Corp. (YWB), as its wholly owned subsidiary. Under Bermuda law, that company was exempt from Bermuda's ownership restriction laws because it only sold goods to online buyers who were outside of Bermuda. YWB's e-tail website was set up on a server that was located and operated in Bermuda, and its content intentionally targeted the U.S. market (e.g. prices quoted in U.S. currency, specific U.S. delivery options, links to U.S. boating content like weather reports, journals and U.S. boating news). Any potential sales that it otherwise might receive from Canadian shoppers were seamlessly redirected to YWC's Canadian website.
  4. YWC decided that YWB's operation should, for now, focus only on the U.S. market before expanding its market focus to Europe. YWC could have allowed YWB to sell its products to Canadian residents online, but depending on the specific situation, those revenues may not be exempt from Canadian tax and may have to be included directly in YWC's income. The focus forward for YWB was the U.S.
  5. YWC and YWB entered into a standard "fair market value" inter-company services agreement8 whereby: (1) YWB received a TM (and other IP) license to create, brand and operate YWB's international e-tail business in Bermuda (and via the YWB website); and, (2) YWC was retained to provide YWB with ongoing consulting and advisory services based on YWC's business process knowledge, e-tail know-how, supplier relationships, fulfillment logistics, and general business knowledge to support YWB's business.
  6. As the sole shareholder, YWC elected a small number of YWB board directors who were comprised of a lawyer from YWB's local Bermuda law firm, a local business person with e-tail experience and an experienced YWC business manager who was transferred to Bermuda to both Chair YWB's board of directors and to run the day-to-day operations of that e-tail business in Bermuda.
  7. As a matter of efficiency and maintaining a cost-effective operation, YWB decided that all other of its technical (IT and server) operations, administration, back-office operations, accounting, local legal/regulatory compliance, fulfillment/logistics management, payment gateway, local banking relationship, and online security monitoring should be locally outsourced to a "turn-key" e-tail management services enterprise in Bermuda with specialized and experienced expertise in operating international e-tail businesses. Pursuant to that Online Retail Support Services Agreement, that local team of outsourced personnel ensured that all of the operations of YWB became as automated as possible and supported in Bermuda.
  8. To secure reliable sales fulfillment services in the U.S. market, YWB entered into a services contract with a highly reputable and experienced fulfillment (inventory supply logistics, warehousing, and delivery) service provider in the U.S (U.S. Logistics Co., based in Bangor, Maine). YWB also separately contracted with the same customer support call centre service provider in India that YWC used for the Canadian market. YWB's aggressive advertising campaign into the U.S. market was directed from Chicago under a contract that YWB entered into with the same Canada-U.S. advertising firm that YWC used out of their Toronto office.
  9. YWB's corporate presence in Bermuda also allowed their local Bank in Bermuda to ensure that all of YWB's U.S. customers could use their usual credit cards to purchase YWB's products.9
  10. Simply stated, YWB was cost-effective and well managed in Bermuda with the support of: a small local board of directors; a dedicated local manager; support from an experienced Bermuda "turn-key" back-office operations services provider that YWB supervises and manages; and, U.S. fulfillment, advertising/marketing and call-centre support services that are provided by experienced providers who are all located outside of Bermuda.
  11. YWB's business expanded very rapidly and within the first year YWB's revenues exceeded YWC's revenues by 250 percent, which is still only a small fraction of the potential online market share that YWB could secure in the much larger U.S. market. In a sense, YWB leveraged the business know-how of YWC to rapidly expand its sales through YWB in Bermuda into the highly lucrative U.S. market. YWB's growing profits in Bermuda were not taxed in Bermuda, and they were also not taxed in Canada when they were repatriated to YWC as dividend payments to its parent company.


Canada's online retailers of all sizes, and across all genres, require cost-effective, easy to manage and support, and reliable implementation strategies to expand their online business into lucrative international markets. The clear tax advantages of the Canada-Bermuda TIEA may provide the tipping point for many Canadian online retailers who seek those investment and growth opportunities in foreign markets. Long term strategies for significant e-tail expansion into foreign markets requires efficient management and cost-effective investment, but where that investment is so aggressively supported by highly beneficial Canadian tax policies and law, those opportunities certainly demand very close examination, if not a full swan-dive.


  1. April-July 2012, cited by Portfolio in its article "Growth of E-Commerce Sales Despite The Recession in the UK",
  2. Statistic Canada, CBC Report, June 12, 2013.
  3. Ibid.
  4. IBISWorld, "Online Retail in the U.S.",
  5. Forbes, Tech ed. research 3/14/2013, report by Sucharita Mulpara.
  6. The case study presented is fictitious, but widely based upon numerous successful retail enterprises in Canada who may wish to rely on the tax advantages of Canada-Bermuda TIEA to enhance their profitability. This hypothetical case is described in the past tense to describe YWC's expansion into global markets on a Canadian tax exempt basis.
  7. There are many different and effective corporate and commercial structures that are possible to implement, and this particular case study is provided for illustration purposes only. In our experience, each corporate and commercial structure must be specifically tailored to suit the unique facts of each online retailer and its operations.
  8. This agreement would be subject to the transfer pricing rules under Canada's tax laws meaning that some compliance work and documentation would be required to ensure that the "fair market value" reflects arm's length pricing.

Acquiring banks' agreements with credit card companies widely stipulate that a bank with an ecommerce acquiring license must only provide credit card services to online merchants that have a corporate presence in the bank's jurisdiction.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bennett Jones LLP | Attorney Advertising

Written by:

Bennett Jones LLP

Bennett Jones LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.