Canadian Corporate Residence

Corporate residence, for Canadian tax purposes, is determined by both statutory deeming rules and common law principles. Let’s examine each of these in detail.

Statutory Rules

Paragraph 250(4)(a) establishes that a corporation incorporated in Canada after April 26, 1965, is considered a Canadian resident corporation. For corporations incorporated before this date, residency depends on meeting the criteria set out by common law rules or conducting business in Canada.

Common Law Rules

Even if a corporation is not incorporated in Canada, it may still be deemed a Canadian tax resident under common law rules. According to these rules, a corporation’s residence is determined by the location where its central management and control is exercised. This principle, known as the central management and control test, originated from the House of Lords’ decision in De Beers Consolidated Mines Ltd. v. Howe, in the United Kingdom.

The central management and control test is a factual determination, and a key factor considered by courts is the location where the corporation’s board of directors make decisions. The board of directors has the legal authority to manage the corporation’s affairs, and their residence often determines the tax residence of the corporation.

Relevance of Shareholders

In general, the residence of shareholders is not significant when determining corporate residence. Directors are not obligated to follow the instructions of shareholders, and thus, shareholder residence does not typically impact central management and control.

However, in certain cases, shareholder residence may become relevant to the central management and control test. If shareholders exert influence over the directors and effectively control the corporation, their residence may influence where the corporation’s central management and control is considered to be exercised.

Pro Tip: Incorporation and Directorship

When deciding where to incorporate and selecting directors for a corporation, it is crucial to consider the implications for the corporation’s tax residence. If you desire a Canadian resident corporation, incorporating in Canada and appointing Canadian resident directors is advisable. Conversely, if you wish to establish a non-resident corporation, incorporating outside of Canada and appointing non-Canadian resident directors should be considered. It is recommended to consult a tax professional to ensure proper planning of corporate tax residency.

Frequently Asked Questions (FAQ)

1. Are Canadian tax resident corporations taxed?

• Yes, Canadian resident corporations are subject to Canadian tax on their worldwide income.

     2. Are corporations separate legal entities?

• Yes, for Canadian tax and corporate law purposes, corporations are considered separate and distinct legal entities apart from their owners.

     3. Can a corporation not incorporated in Canada be a Canadian resident corporation for income tax purposes?

• Yes, under common law rules, a corporation’s residence is determined by its central management and control, regardless of its place of incorporation.

Conclusion

Understanding the starting point of tax law, as outlined in section 2 of the Income Tax Act, is crucial to grasp the tax obligations of individuals and corporations in Canada. Corporate taxation involves considering the residence of the corporation and the principles of tax integration. By navigating the statutory rules and common law principles, corporations can determine their tax residency and plan their operations accordingly.

If you’d like to learn more or looking for tax services, please reach out to us at help@futurecpa.ca.