Problem 5 (Text: Ch. 2) The taxpayer company was incorporated in the Bahama Islands in 1967 as a subsidiary of S Ltd., a public Ontario company. Two other subsidiaries of S Ltd. were engaged in the business of casualty and property insurance in Canada and were experiencing difficulty in complying with Canadian and Ontario government regulations requiring insurance companies to limit their premiums to twice their capital and surplus. To solve this problem, the taxpayer company was incorporated to engage in the reinsurance business. Originally the taxpayer company had five Bahamian directors and four Canadian directors. However, by September, 1969, all the Canadian directors had resigned with the exception of one who subsequently became a Bahamian resident. All meetings of the taxpayer were held in the Bahamas where its books, minutes and shareholders' registry were kept and where all corporate housekeeping activities were carried out. The
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