Is a business a resident of Canada for tax purposes?
Through the process of incorporation, a corporation is considered a legal person that is distinct from you. As a corporation has no physical existence, questions often arise about the residence of a corporation. For tax purposes, it is important to ensure that your corporation is considered a resident of Canada to ensure the corporation meets its tax liabilities. Specifically, if the corporation is considered a resident of Canada it will be taxed on its worldwide income for the whole year as opposed to only Canadian source income.
If a corporation was incorporated after April 26, 1965, the Income Tax Act has determined that the residency of a corporation is subject to the place of incorporation. If incorporation took place in Canada, then the corporation is deemed to be a resident of Canada. If your company was incorporated before April 26, 1965, attention must be given to the central management and control rule to confirm your company’s residency.
The central management and control rule states that a corporation is considered to reside where the corporation’s board of directors meets rather than the place of incorporation. The place of the meeting is important for residency as it is understood that this is the location where decisions are made about the general policy and direction of the corporation. Relevant to the residence of a company is not where central management and control is exercised according to the articles of incorporation, but where it is actually exercised.
As control is a key aspect in determining residency, consideration should be given to whether there is a unanimous shareholders’ agreement, as this may cause a corporation to reside where the controlling shareholders reside.
Tax Treaties and Place of Residence
Where a corporation that would otherwise be resident in Canada is, under a tax treaty between Canada and another country, resident in the other country, subsection 250(5) deems such corporation to be non-resident in Canada. This would be the case where a corporation is considered resident in Canada for the purposes of the ITA under common law but is, under a tax treaty between Canada and another country, resident in the other country. A corporation that claims to be a resident of a treaty country must establish, for the treaty to apply, that it is taxed comprehensively in the treaty country
The tiebreaker rules (usually within Article IV) in tax treaties generally provide that if a corporation is a resident of both contracting states, it is deemed to be a resident of the state in which the corporation was created. However, the same corporation may be naturalized in another jurisdiction by the granting of articles of continuance (or similar constitutional documents) in its new home. Such action is described as corporate continuance or continuation, which seeks to grant the corporation continuance under the CBCA or the OBCA in the new jurisdiction. The tiebreaker rules in tax treaties generally state that the corporation will be treated as a resident of the treaty country into which it has continued, not the country of original incorporation.
There are rules in the Income Tax Act that prevent taxpayers from selecting the residence of a corporation based solely on reducing the corporation’s tax liability. Consult your tax advisor or lawyer for more information about how to determine residency so that you meet all of your tax requirements.
Caution – Consult Your Tax Advisor
There are rules in the Income Tax Act that prevent taxpayers from selecting the residence of a corporation based solely on reducing the corporation’s tax liability. Consult your tax advisor or lawyer for more information.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.