Residency of a corporation
What is a Canadian corporation?
Section 89 of the ITA defines a Canadian corporation as one that is resident in Canada and was:
- incorporated in Canada; or
- resident in Canada from June 18, 1971, to the present
A corporation formed by a corporate reorganization is a Canadian corporation due to incorporation in Canada only if:
- the reorganization happened under the laws of Canada or a Canadian province or territory; and
- each of the involved corporations was, just before reorganization, a Canadian corporation
Residency of a corporation
The ITA does not define residency. Generally, we determine a corporation’s residency using common-law principles. In addition, there are statutory provisions that deem a corporation to be either resident or non-resident under certain circumstances.
A corporation can be resident in Canada without being a Canadian corporation.
To determine if a corporation is resident in Canada, we first consider the deeming provisions of the ITA.
Deemed resident – Subsection 250(4)
A corporation is deemed to have been resident in Canada throughout a tax year if:
- it was incorporated in Canada after April 26, 1965; or
- it was incorporated in Canada before April 27, 1965, and, during any tax year after April 26, 1965, it:
- was resident in Canada under the common-law principles discussed below; or
- carried on business in Canada
If a corporation is not deemed resident under the ITA, it may still be a resident of Canada under common law.
Common law has generally established that a company is resident in the country in which its central management and control is exercised. British courts have rejected the place of incorporation as the one test of residence of a company because this is only a circumstance like the birth of an individual. Other factors, such as the place where the principal business is done, books and records are located, the company seal is kept, bank accounts are maintained, and where the directors reside, have been considered by British courts as useful, but not conclusive.
British courts have emphatically stated that the true rule in determining the residence of a company for purposes of income tax is “where the company’s real business is carried on.” In the opinion of the courts, “the real business is carried on where the central management and control abides… This is a pure question of fact to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading.”
Usually central management and control abides where the members of the board of directors meet and hold their meetings. 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. It may well happen that actual control is exercised by directors resident in one country, while directors resident in another country who ought to have exercised control stood aside from their directorial duties.
Income tax treaties often include a definition of residence for the particular treaty. Since treaties override the ITAwhenever a corporation is considered resident in more than one country, including Canada, reference must be made to any treaty that applies.
Deemed non-resident – Subsection 250(5)
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 may be deemed to be resident in Canada due to incorporation in Canada; however, the same corporation may also claim to be a resident of a treaty country if it meets the residence definition in a treaty. 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.
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 (Crown Forest Industries Limited [95 DTC 5389]). The fact that the corporation’s worldwide income is subject to a preferential tax rate, or enjoys a tax holiday in the treaty country would not, in or by itself, disqualify the corporation from being treated as a resident of the treaty country.
A corporation may be deemed to be resident in Canada by virtue of its original incorporation in Canada; 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. 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.
Corporations with dual residency issues should contact the International Tax Section of the nearest tax services office.
Continued corporation – Subsection 250(5.1) – Emigrant
Subsection 250(5.1) of the ITA relates to the tax consequences where a corporation already organized and incorporated under the laws of one country continues into a new jurisdiction under granting articles of continuance in the new jurisdiction. The basic principle of subsection 250(5.1) is that a corporation that has been granted articles of continuance in a particular jurisdiction will be deemed as having been incorporated in that jurisdiction until the time, if any, that it continues in a different jurisdiction.
For example, a corporation that was originally incorporated in Canada but was later continued abroad, will no longer be treated as if it was incorporated in Canada, and will no longer be deemed to be resident in Canada under subsection 250(4); however, the corporation may remain resident in Canada under common law by keeping its central management and control in Canada. Similarly, a corporation originally incorporated in a foreign jurisdiction but later continued into Canada is deemed to be incorporated in Canada from the date of the continuance. It will also be deemed to be resident in Canada under subsection 250(4) of the ITA.
A corporation that earlier continued abroad and later continued to a particular jurisdiction will be deemed incorporated in that particular jurisdiction, not in any other jurisdiction.
In the event of dual residence of a corporation to which a tax treaty applies, the issue of residence will be resolved by referring to the tax treaty.
When a corporation stops being a Canadian resident, it will be subject to taxes after its emigration.
Residency of an international shipping corporation – Subsection 250(6)
A corporation that is incorporated outside Canada is deemed to be a non-resident throughout a tax year if certain requirements are met. One requirement, in subparagraph 250(6)(a)(i), is that the corporation’s principal business in the year be the operating of ships in international traffic. A second requirement, in subparagraph 250(6)(b)(i), is that all or almost all of the corporation’s gross revenue for the year be from shipping operations. For this provision, international traffic, as defined in subsection 248(1) of the ITA, may include shipping between points along the St. Lawrence River or the Great Lakes. For more information, see interpretation bulletin IT-494, Hire of Ships and Aircraft From Non-Residents.
A foreign incorporated international shipping corporation may place its ships in one or more separate wholly owned subsidiaries. Wholly owned in this context means 100% owned by the parent or through a chain of 100% owned corporations. For 1995 and later tax years, this deeming rule is extended, by subparagraph 250(6)(a)(ii), to parent corporations that hold throughout the year shares of one or more subsidiaries provided they are wholly owned non-resident subsidiaries.
Each of the subsidiaries has to meet the business and gross revenue tests described in the first paragraph of this section. If a parent corporation is operating through subsidiaries as described above, the parent corporation need not meet the principal business test itself, as long as the total cost amount to the parent corporation of its shares in such subsidiaries is throughout the year at least half the total cost amount of all its property.
For 1995 and later tax years, subparagraph 250(6)(b)(ii) includes in international shipping revenue a parent corporation’s dividends received from its wholly owned subsidiaries; however, the wholly owned subsidiaries must have been resident in a foreign country throughout each of the parent corporation’s tax years that began after February 1991, and before the last time at which dividends were paid.
The deeming provisions contained in subsection 250(6) do not apply in a tax year where a corporation formed outside Canada was granted articles of continuance in Canada before the end of the year.
When a corporation is no longer a Canadian resident under common law, statute, or treaty, and becomes a non-resident in a year, the ordinary rules for becoming a non-resident apply.
The ordinary rules include:
- subsection 128.1(4) – Deemed changes to its tax year, deemed changes to its fiscal period, and deemed disposition of its property
- Part I tax, plus departure tax, under section 219.1 of Part XIV. For 1996 and later tax years, the departure tax liability for the tax year that is deemed to have ended applies to all corporations that stop being resident in Canada and not merely to those that stop being Canadian corporations
For later tax years, tax liabilities may include:
- subsection 115(1) – Liability under Part I
- more Part XIV tax, known as additional tax on non-resident corporations, under section 219 on income referred to under subsection 115(1); and
- Part XIII withholdings – Liability on certain kinds of Canadian-source income
Departure tax – Section 219
There is a 25% departure tax liability under section 219.1 that applies for the tax year considered to have ended because the corporation emigrated from Canada to take up residence in a new jurisdiction. This liability is not affected by any treaty that Canada may have signed with the corporation’s new country of residence because, for the referenced year, the corporation is resident in Canada only.
Any additional tax on non-resident corporations that may apply to the non-resident corporation under section 219 is subject to any overriding provisions in an applicable tax treaty.