Introduction - CRA Guidance on COVID-19 and Tax Residence
The COVID-19 pandemic has resulted in Canada and many other countries introducing international travel restrictions as well as making many individuals reconsider their normal travel plans. The locations individuals spend time in during the year is key to determining the tax residence of individuals and of businesses, which in turn is important to the overall tax position of those individuals and businesses. Since the pandemic has disrupted travel plans, it may have also impacted the tax residence status of some individuals and businesses. The Canada Revenue Agency ("CRA") has published some administrative guidance about how the pandemic will influence the CRA's interpretation of the criteria for Canadian tax residence established under Canadian tax law.
Effects on Individual Residence - CRA Guidance on COVID-19 and Tax Residence
Individuals visiting Canada at the time pandemic travel restrictions were introduced may not have been able to return to their normal country of tax residence has they had intended. The Canada Revenue Agency has provided some guidance regarding how they will interpret (1) the common-law factual determination of whether an individual is a tax resident of Canada and (2) the application of rule which deems individuals who sojourn in Canada for at 183 days in the calendar year to be Canadian tax resident throughout that year.
At first instance whether an individual is a tax resident of Canada is a factual determination based on considering the strength of the individual's residential ties with Canada. This determination takes into account a large number of different residential factor including the location of an individual's spouse & children, the location of the individual's dwelling place, where the individual is employed, where the individual's bank accounts are located, whether the individual has a Canadian driver's licence, and the individual's Canadian immigration status. The CRA has issued guidance indicating that when an individual has remained in Canada solely because of pandemic related travel restrictions, that factor alone will not cause it to consider that individual to be a Canadian resident. As being forced to remain in Canada for an extended period is likely to affect many different residential factors, this guidance will be of limited assistance to many taxpayers.
When an individual "sojourns" in Canada for at least 183 days during a calendar year, that individual is deemed to be a tax resident of Canada throughout that year. To "sojourn" in Canada means unusual, casual, or intermittent visits or stays in Canada, a mode of spending time in Canada that does not rise to the level of factual residence. The Canada Revenue Agency has issued guidance indicating that it will not consider days during which an individual is present in Canada and is unable to return to their country of residence solely as a result of pandemic travel restrictions to count towards the 183 day threshold for deemed residence when the relevant individual is usually a resident of another country and who both intends to return to that country and actually does return to that country when he or she is able.
Effects on Corporate Residence - CRA Guidance on COVID-19 and Tax Residence
One of the key factors for determining whether a corporation that has been incorporated outside of Canada is a Canadian tax resident is if the central management and control of that corporation is located in Canada. When assessing where the central management and control of a corporation is located, one key factor is the location that the board of directors of the corporation typically meets. As pandemic related travel restrictions will prevent Canadian board members from travelling to other countries for board meetings, this may impact the tax residence of some corporations.
When a corporation would be considered a tax resident of two different countries, if those countries have enacted a tax treaty, then there are typically tie breaker rules in the treaty which will lead to the countries treating the corporation as a tax resident of only one of the two countries. The CRA has issued guidance indicating that in such cases, when a treaty decides the residence of a corporation on the basis of the location of its effective place of management (a similar concept to central management and control), it will not consider the corporation to be resident in Canada solely because a director of the corporation must participate in board meetings from Canada due to pandemic related travel restrictions.
The Canada Revenue Agency has stated that determinations of corporate residence involving potential dual residence with non-treaty countries will be determined on a case-by-case basis. Taxpayers with interests in corporations incorporated in non-treaty countries should be wary of the potential tax consequences of the pandemic for their corporations and consult an expert Canadian tax lawyer for assistance on managing the associated risks.
Tax Tips - CRA Guidance on COVID-19 and Tax Residence
Determining tax residence is complex for both individuals and corporations. It also can have very significant effects on an individual or corporation's overall tax liability. The COVID-19 pandemic has affected the facts that feed into the tax residence status of individuals and corporations. The Canada Revenue Agency has offered some guidance regarding on how it will interpret the effect of the pandemic on residence, but that guidance is vague and of only limited assistance to taxpayers. Individuals and corporations should consult our experienced Canadian tax lawyers to understand the tax residence consequences of the pandemic and learn what steps they should take to obtain the best possible tax results.
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.