Wealthy immigrants to Canada will often have interests in a private foreign corporation (“Forco”).
Certain related tax planning considerations have already been touched on elsewhere in the Canadian International Tax Blog-see the following two articles:
“How Wealthy Immigrants to Canada Can Use a Holding Company to Create a Tax-free Pipeline”
“Special Election for U.S. Expats In Canada With S Corporations Can Avoid Double Tax”
However, in cases where the immigrant (or the immigrant together with the immigrant’s spouse or common law partner) own all the shares of Forco, immigration to Canada may have special implications in at least two respects.
Both of these should be carefully considered as part of the pre-immigration tax planning:
Corporate residency
If the immigrant (and/or the spouse or common law partner) of the immigrant is the sole Director (or if the two of them are a majority) there is a strong likelihood that “mind and management” or “central management and control” of Forco will be in Canada.
If so, Forco would become a corporation resident in Canada based on common law concepts of corporate residency, even though Forco was incorporated in another jurisdiction. Under Canada’s domestic tax law, that is sufficient to make it resident for tax purposes.
Nevertheless, if Forco is also resident in another jurisdiction that is party to a tax-treaty with Canada, one must also consider the possible relevance and application of any “tie breaker” rule in that treaty.
For example, if Forco is a S or C Corporation formed in the US, it would generally still be considered a US resident, and not a Canadian resident, even though its “mind and management” has been moved to Canada. This is because of the fact that Article IV(3) Canada’s tax treaty with the US looks to the jurisdiction of incorporation to resolve corporate dual residency issues.
However, the provisions in most of Canada’s tax treaties are not that clear-cut.
For example, what if the immigrant is the sole Director of a Forco formed in the UK that carries on an insurance brokerage there?
When the immigrant moves to Canada, Forco will become a Canadian resident because its “mind and management” will move to Canada. It will also continue to be resident in the UK under its tax laws, because was incorporated in the UK.
Unfortunately, in that case, Article 4(3) of the relevant treaty just leaves it to the taxing authorities in Canada and the UK to resolve the dual residency issue without providing any clear rules.
In cases where Forco becomes resident in Canada upon the immigrant’s arrival in Canada, it will be subject to Canadian tax on its worldwide income and also it will be subject to all the customary Canadian tax reporting and withholding requirements. These requirements may be particularly complicated by the fact that it is carrying on business outside of Canada.
In addition, unless an election is filed under paragraph 128.1(2)(b) of the Income Tax Act (“the Act”) within 90 days after becoming resident in Canada, the “paid-up capital” (“PUC”) of the Forco shares for the purposes of the Act will limited to their capital under the relevant corporate law, which will likely be nominal. If the election is filed, the PUC can be bumped for the purposes of the Act to an amount that should approximate the fair market value at the time of immigration. This will have a bearing on the amounts that can be withdrawn on a direct distribution from Forco to the immigrant on a tax-free basis.
In situations where residency in Canada for Forco would not be considered desirable, consideration should be given to:
- Appointing new Directors located outside of Canada, or
- Ceasing to use Forco.
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Carrying On Business in Canada
In cases where Forco actually carries on some business (as opposed to just being an investment holding company) consideration should be given to the nature of that business, and particularly the role that the immigrant (and/or spouse or common law partner, if applicable) will play in it after moving to Canada.
That is, even if Forco avoids obtaining Canadian residency for tax purposes, it can still be liable for Canadian taxation and/or reporting requirements if any part of its business is carried on in Canada.
Accordingly, the role that the immigrant plays in the business must be examined to determine if that applies.
In addition, if it does apply, and Forco is resident in a jurisdiction with which Canada has a tax treaty, consideration will also have to be given to the question of whether Forco is exempt from Canadian taxation on the basis of not having any “permanent establishment” (“PE”) in Canada.
In this regard even if Forco has no office in Canada, the immigrant’s presence in Canada may create a deemed PE if he/she has general authority to conclude contracts in Forco’s name.
However, even if there is no PE, Forco will still be required to file a Canadian corporate tax return (T2) annually as long as it is carrying on business in Canada. Failure to file can subject Forco to a fine of $2500 for each year, even if no tax is payable.
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
