Taxation Differences between a Resident and Non-Resident Corporation of Canada
Corporations resident in Canada are taxed on their worldwide income, while non-resident corporations of Canada are taxed only on their Canadian source income. Canadian sourced income may include business income, gains from the disposition of taxable Canadian property, and property income. Due to the difference in taxation and related filings between resident and non-resident corporations of Canada, it is important to determine whether your corporation is or could be a resident or non-resident of Canada.
Corporations Incorporated in Canada are Residents in Canada
Under Canadian tax law, a corporation is deemed to be a resident in Canada for tax purposes if it was incorporated in Canada after April 26, 1965.
Continuing a Corporation into Canada Results in the Corporation Becoming a Resident in Canada
Corporate continuance is a process by which a corporation ceases to be governed by the corporate laws of a particular jurisdiction and becomes governed by the corporate laws of another jurisdiction. A corporation which is continued into Canada is deemed to have been incorporated in Canada, and thus becomes a resident of Canada on the day it is provided with its Articles of Continuance.
Corporations not Incorporated in Canada could be Residents in Canada if their Central Management Decisions are Made in Canada
Under Canadian tax law, corporations incorporated in a country other than Canada, but which exercise their central management and control in Canada, become a resident in Canada for tax purposes. Central management and control refers to the "head and brains" and directing authority of the company, and not the day-to-day operations of the company. The country in which this is exercised is usually where the majority of the board of directors meets to make decisions.
The central management and control rule can also apply to a foreign subsidiary of a Canadian parent, where the Canadian parent makes the central management decisions for its foreign subsidiary. In cases where the foreign subsidiary has its own board of directors directly responsible for that foreign subsidiary, the subsidiary could still be resident in Canada if it merely rubber stamps central managerial directions provided by the Canadian parent.
However, case law also exists which provides to the contrary. For example, sometimes a Canadian parent will set up an intermediary corporation in a low tax jurisdiction with a low dividend rate for purposes of the intermediary corporation selling products to other countries on behalf of the Canadian parent. This structure may be set up because it results in the profits taxed at a low rate and dividends subsequently being paid to the Canadian parent tax-free, or at a very low tax rate. Where the board of directors of the intermediate subsidiary were resident in that low-tax jurisdiction and were reasonably inactive, in some cases courts have held that the intermediary corporation was a resident of the low tax jurisdiction. One factor contributing to this was the extent of functions of the intermediary corporation, i.e. if they are minimal and can be handled by employees of the corporation, largely inactive directors could be determined to be valid directors.
The Effect of Some Treaty Tie-Breaker Rules
A corporation deemed to be a resident under Canadian tax law can become a non-resident of Canada under certain tax treaty rules. In particular, this occurs when the corporation is a resident in another country which has a tax treaty with Canada, and the treaty has (a) provision(s) which determine(s) the corporation is not a resident in Canada, and a resident in the other country.
Tax Tips for Determining the Residence of a Corporation
If you are the owner of a corporation, and prefer your corporation be a resident for tax purposes in a particular country, you should ensure all board meetings are held in that jurisdiction and the majority of board members are resident and meet in that particular jurisdiction. You should also have an experienced Canadian tax lawyer document this accordingly.
If you are the owner of a Canadian parent corporation which owns a foreign subsidiary, and prefer for the subsidiary not to be deemed a resident of Canada for tax purposes, it is safest to ensure the board of directors of the foreign subsidiary make decisions independently of the Canadian parent and have an experienced tax lawyer document this accordingly.
However, court decisions have not always resulted in what a taxpayer would expect from the application of the central management and control rule. Therefore, it is in your best interest to receive consultation from an experienced tax lawyer when determining the residence of your corporation and/or the residence of a corporation proposed to be formed in a tax planning scheme. An experienced tax lawyer will be familiar with the applicable treaty and case law, and thus can provide a more thorough assessment of what the Canada Revenue Agency and courts would rule with respect to the residence of the corporation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.