David Rotfleisch: Corporate Tax Residency Vs. Individual Tax Residency in Canada

Under Canada’s tax system, the importance of your residency status cannot be overstated. It determines the extent of your tax obligations and filing requirements for individual and corporate taxpayers alike.

In either case, an individual or corporation resident in Canada must pay Canadian tax on worldwide income. Non-residents, on the other hand, are taxed solely on their Canadian-sourced income.

Despite these similarities, the methods used to determine residency status differs greatly from individuals to corporations, a distinction only complicated by the fact that “resident” has no formal definition in the Income Tax Act.

Determining whether an individual or corporation is a resident of Canada isn’t always easy, but with its implications for tax liability, you must understand your status. How can you do this? An experienced corporate tax lawyer looks to common law principles and statutory provisions.

How is Corporate Residency Determined in Canada?

Perhaps the most straightforward path to corporate residency is linked to the time of incorporation. Under Subsection 250(4), a corporation may be deemed a resident of Canada if it was incorporated in Canada after April 26, 1965.

Older corporations incorporated before that date may still be deemed a resident if they satisfy one of the following two provisions:

• Is a resident under common-law principles
• Carries business in Canada

Should a corporation satisfy either of the above provisions, it may be deemed a resident of Canada regardless of its incorporation date.

Corporate Continuance & How Carrying on Business in Canada Impacts Residency

Corporate continuance is a special process whereby a corporation originally incorporated in one jurisdiction becomes governed by the corporate laws of another jurisdiction.

If a corporation that was incorporated abroad later continues in Canada, two things are recognized:

• The corporation is deemed to be incorporated in Canada as of the date of continuance
• The corporation is deemed a resident of Canada as a result

This basic principle also works in reverse. If a corporation was first incorporated in Canada but later continues abroad, it could lose its resident status in Canada.

Common Law & How Location of Central Management Affects Residency

Common law dictates a corporation might be deemed a resident of Canada by the location of its central management and control. Considered the “head and brains” of a corporation, central management and control refers to the directing authority of the company rather than its day-to-day operations.

If the principal business is carried out in Canada — and the majority of its board of directors are also located in Canada — the corporation may achieve corporate tax residence in Canada.

This is particularly important to note for Canadian corporations with foreign subsidiaries, even if the subsidiaries have their own board of directors. A subsidiary could still be resident in Canada if its board of directors’ rubber stamps central managerial directions made by the Canadian parent company.

Deemed Non-Resident Corporations in Canada

Considering what we’ve discussed above, a corporation may be deemed a non-resident of Canada for the following three reasons:

• It was incorporated before April 26, 1975
• It continues in a foreign jurisdiction and becomes governed by the corporate laws of another jurisdiction
• It fails the common law test with its central management and control located in a foreign jurisdiction

With this last point, a Canadian parent company may purposefully establish an intermediary corporation in another jurisdiction with the hopes that the courts will decide the intermediary is a resident of this foreign jurisdiction.

Why would a Canadian parent company follow this structure? There are two benefits if the intermediary is set up in a low tax jurisdiction with a low dividend rate:

• The intermediary’s profits would be taxed at a low rate
• Dividends paid to the Canadian parent company would be tax-free or taxed at a meagre rate

How is Residency Determined for Individuals in Canada?

Much like a corporation, an individual may be deemed a resident of Canada by how and where they conduct themselves.

The Supreme Court of Canada has defined a taxpayer’s residence as:

• “The place where in the settled routine of his life he regularly, normally or customarily lives”
• “The degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living”

With this in mind, residency for individuals comes in two forms: factual and deemed residents.

Factual Resident with Significant Residential Ties

A factual resident earns residency because they have significant residential ties to the country, regardless of whether they live in Canada full-time.

Significant residential ties to Canada include having a home, a spouse or partner, or dependents in Canada.

Secondary residential ties may include owning additional personal property in Canada, having social, cultural, or economic ties to Canada, a Canadian driver’s licence or passport, and health insurance with a Canadian province or territory.

Someone who spends a fraction of the year abroad may still be a factual resident, provided they have such residential ties, and their life habits suggest they have a settled routine in Canada.

Deemed Resident with or without Significant Residential Ties

A deemed resident is anyone who spends 183 days or more in Canada during one calendar year. You may be a deemed resident of Canada even if you don’t have significant residential ties in the country, provided you spend more than half the year in Canada. You don’t have to customarily live in Canada or have a settled routine in Canada either.

Individuals Deemed Non-Resident in Canada

An individual may be deemed a non-resident of Canada if the courts decide they don’t meet the requirements of factual or deemed residency.

Here, it’s interesting to note the courts and CRA have considerable liberty when determining whether a taxpayer has established a settled routine in Canada. Case law shows significant residential ties may not be significant enough to overcome time spent outside the country, especially as it applies to immigrants to Canada.

In Yoon v The Queen (2005 TCC 366), a Korean-born taxpayer met and married her husband in Canada in 1975 before becoming a Canadian citizen. After living in Canada for 26 years, Yoon moved to Korea for work while her husband remained in Canada with their child.

Despite being a Canadian citizen with significant ties to Canada, Yoon was deemed a non-resident of Canada in 2001 by the Tax Court of Canada because she spent two-thirds of the year working in Korea. Her employment income from that year was therefore exempt from Canadian taxation.

Numerous tax cases suggest this kind of ruling is not the exception but the rule when determining whether a foreigner has become a Canadian tax resident.

Can Tax Treaties Impact Individual or Corporate Residents in Canada?

Both individual and corporate residents can become non-residents of Canada under certain tax treaty rules.

An individual and corporation may become non-residents of Canada if they are a resident in another country which has a tax treaty with Canada. Tie-breaker clauses determine of which country the individual or corporation is a resident. These rules prevent double taxation when two countries claim jurisdiction of the person’s or corporation’s income.

What Are the Tax Implications for Non-Residents Vs. Non-Resident Corporations?

An individual’s or corporation’s status as a non-resident determines the extent to which Canada may tax the person’s or company’s income.

For Non-Resident Individuals

You must pay tax on any income you receive from sources in Canada. That may include a traditional paycheck as an employee (which may be subject to withholding tax), as well as dividends, rental payments, annuity payments, pensions, RRSPs, and retiring allowances.

The CRA will not tax any income earned outside of Canada.

For Non-Resident Corporations

If you are the owner of a non-resident corporation, you will only be taxed on its Canadian-sourced income. This may include business income, gains from the disposition of taxable Canadian property, and property income.

Like individuals, corporations will not be taxed by Canada on income sourced from other countries.

Determining Residency Can Be Challenging

Determining your residency status in Canada can be challenging — whether you’re an individual or the owner of a corporation.

As an individual, the criteria by which the courts and CRA review the significance of your residential ties isn’t always clear. What you think are significant residential ties may not correspond with Canada’s tax law. Not even Canadian citizenship is enough to seal a ruling of resident in Canada, as proven by the Yoon decision.

Meanwhile, corporations cannot always anticipate court decisions when it comes to the central management and control rule. This can complicate your tax filings, whether you prefer your subsidiary to be deemed a resident of Canada for tax purposes.

Misconstruing your tax residency can result in under- or over-reporting your Canadian taxable income. Regardless of your intentions, these errors can lead to steep monetary penalties for both individuals and corporations.

Efficient tax planning can help you avoid such consequences. Talk to an experienced Canadian tax lawyer to understand case law favouring your preferred position. This professional can help provide a thorough assessment of how the CRA and courts would approach your residency. But more importantly, an experienced tax lawyer can help you document evidence to ensure it meets the necessary factual and legal standards.

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