A corporation that is resident in Canada for Canadian income tax purposes is subject to Canadian income tax on its worldwide income. On the other hand, corporations that are not resident in Canada are only subject to Canadian income tax on their Canadian-source income. Accordingly, residency is an important factor in determining which Canadian income tax regime applies.
Generally, a corporation will be deemed to be a resident in Canada if it has been incorporated in Canada. Absent a deeming provision, a corporation can also be resident in Canada based on common law principles. The common law test for corporate tax residency is the place where the corporation’s central management and control is exercised. This test is a question of fact. Some of the factors that courts have looked to in concluding the tax residency of a corporation include:
- the place where directors meet (this has been a particularly important factor);
- the principal place where business is conducted;
- the residency of the directors;
- the influence that foreign directors have in comparison with Canadian directors;
- the location of corporate books and records; and
- the location of the corporation’s bank accounts.
The application of income tax treaties may also affect the residency of a corporation for Canadian income tax purposes. Businesses should keep these factors in mind when selecting corporate directors and developing policies that govern how a corporation’s management should be undertaken (for example, maintaining a majority of Canadian resident directors if Canadian residency is desired). With increased business travel, ensuring that the desired corporate residency is maintained has become more difficult, but it can still be effectively managed with the appropriate protocols.
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