Tax Residency of Corporations

Taxation of Residents Vs. Non-Residents in Canada

The provision of the Income Tax Act (“ITA“) that sets out who is liable to pay income tax in Canada is section 2. Subsection 2(1) states that an income tax shall be paid each year on the taxable income of “every person resident in Canada.” 

All resident persons must pay tax on their worldwide income (i.e., any income earned inside and outside Canada). However, the ITA limits the tax liability of non-residents persons to only income derived from Canadian sources.

Definition of “Person” Under the Income Tax Act

Subsection 248(1) (the definitions section of the ITA) defines a “person” to include a corporation and therefore expands the ordinary definition of a “person” to also include a corporation. As “persons” under the ITA include a corporation, a corporation’s tax liability will depend firstly on whether it is a resident or non-resident of Canada. If a corporation is a resident of Canada, it is subject to tax under subsection 2(1) on its taxable income derived from Canada and worldwide sources.

“Deemed” Resident – Subsection 240(4)

When determining the residency of a corporation, we begin by looking at the provisions of the ITA that set out when a corporation may simply be “deemed” to be a resident of Canada. Paragraph 250(4)(a) of the ITA sets out that any corporation incorporated in Canada after April 26, 1965, is deemed to be resident in Canada. If the corporation is not incorporated in Canada or was incorporated in Canada before April 27, 1965, we must look to the “common law” test of corporate residency.

Common Law Test

The common law is the judge-made laws that have developed through case law. The common law test sets out that corporations not deemed to be resident will be considered residents if their “central management and control” are located in Canada. The common law test is derived from the English case of De Beers Consolidated Mines Ltd. v. Howe, which set out the law that:

“a corporation is a resident in the country where the central management and control actually abides.”

In that case, it was expanded that the central management and control actually abides where the corporation conducts its “real business.” As corporate law confers on the board of directors of a corporation, the legal power to manage its business and affairs, where the central management and control of a corporation “actually abides” will usually be where the members of the corporation’s board of directors reside. There are however certain exceptions to this and ultimately it will depend on the specific factors surrounding the specific corporation.

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.