Overview

When a corporation resident in Canada chooses to emigrate, it faces substantial tax implications under Canadian tax law. For tax purposes, the emigration of a corporation is treated as if it has disposed of its property and then reacquired it immediately. Unlike individuals, corporations do not have exemptions for certain types of property in this deemed disposition process. This article delves into the tax consequences of corporate emigration from Canada, offers strategies to minimize tax liabilities, and provides practical tips for effective tax planning.

Departure Tax and Corporate Emigration Tax Explained

Understanding Departure Tax

The departure tax is an important component of Canadian tax law applicable when a corporation (or individual) stops being a tax resident of Canada. It is activated by the deemed disposition of the corporation’s assets at their fair market value just before the departure. The resulting gains or income from this deemed disposition are taxable under the Income Tax Act.

The departure tax is determined by applying the relevant corporate tax rate to the accrued gains or income at the time of emigration. In essence, the corporation is taxed on the appreciation in value of its assets up to the moment of departure. The amount of tax owed can be substantial, depending on the type and value of the assets held by the corporation.

Under Canadian tax law, the departure tax applies to all property a corporation holds upon emigration. This encompasses tangible assets such as real estate, equipment, and cryptocurrencies, as well as intangible assets like intellectual property rights and goodwill. While certain exemptions or deferral options may be available in specific situations, it is essential to evaluate these possibilities with the assistance of tax professionals.

Corporate Emigration Tax: An Overview

In addition to the departure tax, Canadian tax law requires corporations to pay a distinct corporate emigration tax. This tax is calculated at a flat rate of 25% on the difference between the fair market value of all the corporation’s assets and the following amounts:

• The total paid-up capital of the corporation’s shares,
• Any outstanding debts or financial obligations of the corporation, excluding dividends payable to shareholders,
• Any amounts related to “branch tax” from earlier tax years.

Under Section 219.1 of the Canadian Income Tax Act, a 25% departure tax liability is imposed on the tax year when a corporation emigrates from Canada to establish residence in a new jurisdiction.

Section 219.3, however, provides that the additional tax imposed on a non-resident corporation under Section 219.1 may be reduced by the provisions of any applicable tax treaty.

The corporate emigration tax emphasizes the necessity of consulting with a top tax lawyer for thorough tax planning before a corporation relocates from Canada. By anticipating potential tax implications and structuring the emigration process strategically, corporations can reduce their tax liabilities and maintain compliance with Canadian tax regulations.

Strategies for Reducing Tax Liability

Strategic tax planning is essential for reducing the tax liability involved in corporate emigration from Canada. Various strategies can be utilized to achieve this goal, each offering distinct advantages and considerations.

1. The Pre-emptive Disbursement

One effective strategy is to implement a preemptive disbursement of the corporation’s retained profits to shareholders before the emigration. By converting assets into cash and distributing them to shareholders, the corporation can reduce its tax liability upon emigration. However, this approach requires careful planning to manage the tax implications of dividends, particularly for amounts distributed in excess of the paid-up capital.

For example, if a Canadian corporation with substantial cash reserves chooses to distribute these funds to shareholders before emigrating, the tax consequences can differ. Dividends distributed may incur dividend tax, influenced by the shareholders’ residence status and the relevant tax treaties between Canada and the recipient’s country of residence.

2. Asset Transfer through Amalgamation or Rollover

Opting for amalgamation with another corporation or using rollover provisions under sections 85 to 87 of the Income Tax Act can defer the tax liabilities associated with corporate emigration. Amalgamation involves combining two corporations into one, facilitating the transfer of assets without immediate tax impact. This approach is advantageous for preserving tax attributes like capital losses or surplus profits within the consolidated entity.

When considering an amalgamation or rollover, it is crucial to adhere to the legal requirements specified in federal or provincial business corporation legislation. These regulations are designed to ensure that the transaction qualifies for favorable tax treatment under Canadian tax law, thereby reducing immediate tax liabilities upon emigration.

3. Share-for-Share Exchange

Section 85.1 of the Income Tax Act permits a share-for-share exchange, allowing shareholders to transfer their shares from one Canadian corporation to another taxable Canadian corporation without incurring immediate tax consequences. This transaction is considered to occur at the adjusted cost base of the shares, which can defer tax liabilities on appreciated shares until they are disposed of in the future.

This restructuring approach benefits shareholders with controlling interests in one or more corporations by allowing them to transfer their ownership and control to a different corporate entity. This strategy shields them from the immediate tax impacts of corporate emigration, while still enabling them to retain an interest in the corporation’s value through shares in the new intermediary entity.

Tax Pro Tip: Leveraging Strategic Timing and Expert Advice

Effective tax planning for corporate emigration in Canada necessitates careful timing and expert advice. Starting the planning early allows corporations to utilize available deferral options and refine their tax strategy. Engaging with experienced Canadian tax lawyers is crucial for navigating the complexities of tax laws and ensuring that the strategies employed are well-suited to the corporation’s specific situation.

FAQs

Is it possible for a Canadian corporation to avoid both departure tax and corporate emigration tax?

Though completely avoiding these taxes is difficult, strategic planning can help defer or reduce their impact. Utilizing tax-efficient strategies, such as pre-emptive disbursement, asset transfers through amalgamation or rollover, and share-for-share exchanges, can effectively mitigate the tax liabilities associated with corporate emigration.

What are the reporting requirements following the emigration of a Canadian corporation?

Following emigration from Canada, corporations must meet certain reporting requirements. This involves filing final tax returns, notifying the Canada Revenue Agency (CRA) of the emigration, and adhering to all relevant regulatory obligations. Non-compliance with these requirements can lead to penalties and additional tax liabilities.

Are there any corporate emigration tax and departure tax exemptions or deferrals available?

In certain situations, there may be exemptions or deferral mechanisms that apply. For example, rollover provisions or amalgamation transactions may be used to defer the departure tax under Canadian tax law. Eligibility for these exemptions, however, is dependent on the particulars of each case and should be evaluated with the assistance of a tax professional.

Navigating the tax implications of corporate emigration from Canada requires careful planning and a thorough understanding of available strategies to mitigate tax liabilities. Addressing both departure tax and corporate emigration tax effectively involves employing strategies like pre-emptive disbursement, asset transfers through amalgamation or rollover, and share-for-share exchanges. To ensure optimal tax outcomes and compliance with Canadian tax laws, it is essential for corporations to seek guidance from experienced Canadian tax professionals throughout the emigration process.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”