Canadian corporation as defined under the income tax act:
In case the corporation is formed by reorganization, it’s termed as a Canadian corporation under the following circumstances.
It’s important to note that a corporation can be a Canadian resident without being a Canadian corporation. The income Tax Act has not defined rules regarding the residential status of a corporation. However, status is determined by principles of common law. Likewise, statutory provisions need to be considered for determining deemed residential status.
Let’s discuss deemed and common law approach for determining residential status.
Under the following circumstances corporation is deemed to be a resident.
If a corporation is not deemed resident, it may be resident under common law; let’s have a detailed understanding of the same.
continuance from abroad jurisdiction, it would continue to be governed by Canadian law. Once the abroad Government grants the firm its article of continuance, then the firm would no longer be treated as a Canadian corporation/Canadian resident under subsection 250 (4).
However, if a corporation’s central management and decision-making and control are located in Canada, it can be considered a Canadian resident under Common law.
Likewise, if a firm started abroad and moved to Canada, it would be considered to be established in Canada from the day it receives its article of continuance from the Canadian Government; it’s in line with the provision of subsection 250 (4) ITA.
Once the business is granted continuance from another country, taxes and other provisions of new jurisdiction become applicable. Further, if there seems to be dual residence, the matter is resolved in line with the guidance provided by the treaty.
When a Canadian corporation is granted continuance from new jurisdiction, it becomes non-resident from Canadian tax perspective. Further, if corporation cannot be determined to be resident under common law, statute, and treaty. It becomes non-resident and ordinary rules are applied. These rules include the following.
According to subsection 128.1(4), changes are made to the company’s tax year, fiscal period, and company’s property.
According to section 219.1 of Part XIV, for 1996 and later ta years, for corporations that get non-resident, the departure tax liability is applied. It’s important to note that departure liability is applied to the corporations that become non-resident and not only corporations that leave Canada/ leave status of Canadian corporation.
These were the ordinary rules applicable to corporations leaving residential status.
For later tax years, tax charges may include the following:
Subsection 115(1) –Part I liability,
Part XIV tax which is known as additional tax on non-resident corporations, section 219, for subsection 115(1).
Part XIII withholding tax– Liability income sources.
Under section 219.1, when the company emigrates from Canada, it must pay 25% tax liability as it has migrated to a new jurisdiction from Canada. Further, additional tax on a non-residential corporation is applied in line with the treaty.
Under common law, residential status is determined with control and central management. Operational aspects of the corporation are more important than the place of birth under this approach. For instance, common law considers different factors like the book of accounting records, general company records, bank accounts, the residence of directors, and the place of the company’s seal. British courts consider these factors as one of the important factors in determining residential status.
The company’s control is deemed to be at the place of directors’ meeting to execute operations. So, it’s important to understand where control is exercised to determine residential status. The details mentioned in the corporation’s articles are not sufficient for the purpose of residency determination.
Further, the definition of residence is also defined at the time of treaty formation for a particular place. In case there is a conflict between the tax treaty and the Income-tax Act, treaties will override the income tax act.
A corporation is deemed to be non-resident if the tax treaty determines the corporation to be resident in another country. This situation usually arises when the income tax act considers a corporation resident in Canada for tax purposes. But, the Canadian treaty with other countries considers the same corporation to be a resident of other countries.
So, the corporation incorporated in Canada is deemed to be a resident. However, suppose a tax treaty determines the same corporation to be a resident of another country as per the definition of a residence in the treaty, it’s a tiebreaking situation. In that case, a corporation is deemed a resident of the state where it was created.
If a corporation is considered a resident of a specific country under a tax treaty, it must be taxed in a treaty-based country comprehensively. It does not matter if the corporation pays a preferential rate of tax or enjoys lower tax; it does not lead to any impact on the residential status of the corporation.
By default, a corporation incorporated in Canada is considered a resident. However, the same corporation can be residential in another country if they are granted in articles of continuance. So, there is again a tiebreaking situation. Generally, treaties usually state that corporations will continue to be resident in the country of continuance and not a country of original incorporation.
The law of continued corporation, mentioned in subsection 250 (5.1) of the ITA, states that a company established under the laws of one country will be operated under the laws of the same country. However, if that corporation is granted an article of continuance from another country, it would be deemed a resident and operated under the new country’s laws.
For example, a firm started in Canada is legally recognized by Canadian law, and if it receives the article of continuance under new jurisdiction. As long as the company does not receive the articles of.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.