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Residency of a Corporation for Canadian Tax Purposes

by | Dec 10, 2019 | Personal Tax

Residency of a Corporation is a very important topic to understand as a business owner. This includes knowing what it means to be a corporation resident in Canada v/s in a foreign jurisdiction. There is a big difference in taxation and related fillings for resident v/s non-resident corporations.

Let’s dive in and take a look.

Resident v/s a Non-Resident Corporation

A resident corporation must pay taxes in Canada on their worldwide income. However, non-resident corporations must only pay taxes on their Canadian source income. Canadian source income includes business income, proceeds from the disposition of taxable Canadian property and property income.

Incorporation in Canada (federal or provincial)

If the corporation incorporated in Canada, it is deemed to be a resident in Canada for tax purposes under the Canadian tax law.

Central Management

A corporation not incorporated in Canada will be considered a resident if its central management and control is exercised in Canada. Central management is defined as the directing authority of the company. That is, the place where the board of directors prefer to meet and carry out decisions.

Articles of Continuance

Any non-resident corporation can opt to become a Canadian resident corporation. This can be done through the process of corporate continuance. This is when a corporation stops being governed by the corporate laws in a foreign jurisdiction and becomes governed by the corporate laws of another jurisdiction. A non-resident corporation that is granted the Articles of Continuance in Canada is deemed to have incorporated in Canada, and thus becomes a resident.

Tax Treaty Tie Breakers

A corporation that is deemed a resident in Canada can become a non-resident under the existing tax treaty rules. This can differ from country to country. One thing to keep in mind is that the tax treaty provides that non-resident corporation’s profits are not subject to tax at the Canadian level unless it carries on business in Canada through a permanent establishment. A permanent establishment is defined as:

  • A fixed place of business through which non-resident corporation carries on business in Canada – wholly or partly;
  • A place of management, a branch, an office, factory, workshop that exists for a specified period; and
  • An agent or an employee who has and often exercise authority to conclude contracts in the name of the corporation.

Need Help Determining Residency of a Corporation for you?

Given the complexity in determining the residency of a corporation and tax implications, it is in your best interest to consult an experienced tax accountant before incorporation. We’d be happy to help you navigate this maze. Reach out to one of us at info@thinkaccounting.ca or call us at 905-565-0095!

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