9 How is corporate residency determined in Canada? Why is it relevant?
The residency status of a corporation – just like an individual – will determine where it is taxed and on what sources of income. If a corporation is considered to be resident in Canada, it will be taxed on its worldwide income. If a corporation is considered to be a non-resident, then it will be taxed on its Canadian source income only. Corporations can be ‘deemed’ resident or found to be resident under ‘common law’.
There are several deeming provisions in ITA 250(4) however the most important deeming provision is that any company incorporated in Canada after April 26, 1965 is deemed to be resident in Canada.
According to the Income Tax Act (ITA) Subsection 250(5), a corporation which would be resident of Canada, is deemed to be non-resident if it is considered to be resident in another country based on the tax treaty rules between Canada and the other country.
If a corporation is not deemed to be resident under the ITA, it may still be a resident of Canada under common-law. Although there is no proper definition of ‘common law’ residency rules in the ITA, it is based on the following common-law principles.
Unlike the deemed residency rules, Common Law does not take into importance the place where a corporation is incorporated. According to the Common-law, a corporation is considered resident in the country in which central management is present and control of the corporation is exercised. The following criteria are considered when assessing whether a corporation is resident under common law:
- Place where the principal business is done
- Books and records are present
- Bank accounts maintained and kept
- Company seal is present
- Residence of the directors.
- It is to be noted that International Tax Treaties override the ITA.
The tiebreaker rules in tax treaties will consider the corporation to be resident of the country where it has continued to operate rather than the country where it was incorporated.
Part year resident
Note that the concept of part-year residency (which may be applicable to individuals) is not relevant to corporations. When a corporation is considered resident in Canada it is considered to be resident for the entire year.
Click on this link to a Corporate and Individual Residency flow chart from “Introduction to Federal Income Taxation in Canada” – by Wolters Kluwer
Interactive content (Author: Simran Gill, January 2020)
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