Suppose you are a filthy rich Canadian shipping magnate with boats operating on the seven seas and the Great Lakes. You certainly wouldn't have your ships registered in Canada and pay corporate tax. The logical way to set up this kind of structure would be to put them in "Offshore Companies" or "International Business Corporations" (IBC) in Bermuda. That way you wouldn't be bothered with tiresome things like taxes as long as you, personally, stayed out of Canada.

If at some time you decided to become Prime Minister of Canada that would pose a problem as it is very difficult to run for election from outside the country. However if you return you will be caught by the Income Tax Act, which requires that you pay tax on all your worldwide income. Your offshore companies holding the vessels will now have their income attributed to you personally.

What would you do to avoid paying taxes on your shipping empire? If your Paul Martin you have your friends in government change the Income Tax Act (ITA). So in 1991 sections 81(1)(c), 115(1)(b)(ii) and 250(6) were changed to allow IBC's operating in international shipping to not to have their Canadian owners pay tax on the income. This only applied to IBC's in the international shipping business. All other offshore companies had to pay income taxes if their owners or ‘Mind and Management' resided in Canada. There was still one small problem remaining. If the ships sailed in the Great Lakes or on the St. Lawrence River they would be operating in Canada and taxable in Canada. No problem. The government changed those to international waters, but only for taxation. No Taliban frigates allowed.

All this is great up to a point. How can you get the money back into Canada tax free? Certainly not from Bermuda. The answer is to move the ships to a Barbadian company where they can send you the earnings tax free after paying 2.5% tax to the Barbadians. So the ships were moved to their new domicile. However, in the moving the ships, their cost bases were written up in value from what they were worth in the Bermudian company and as such created capital gains. In 1998 Paul must have received one of those nasty brown envelopes from the Canada Revenue Agency demanding Capital Gains Tax on the ships' appreciation during the 1995 move to Barbados. So the ITA was changed once again in 1998 retroactive to 1995 to insure that any shipping magnates whose vessels had increased in price did not incur some nasty tax liabilities.

The reason the government gave for this largess was to increase Canada's presence in international shipping. Mind you the vessels did not have to be built in Canada or have Canadian crews.

So if you want to pay no Canadian income taxes on your business just go into international shipping with your boats registered in Barbados and like Paul Martin you too can become Prime Minister for a day.