It is relatively difficult for a corporation that is resident in Canada (“Canco”) to become a nonresident.
This is because of the fact that, if Canco was incorporated in Canada, it will be deemed, under the Income Tax Act (“the Act”) to remain resident in Canada, even if its “central management and control” (“CMC”) is moved outside of Canada[1]. Accordingly, even if Canco appoints new Directors that all reside and meet outside of Canada, it will generally remain resident in Canada.
Accordingly, the types of scenarios where Canco could become nonresident would generally be limited to the following:
- Canco was not a incorporated in Canada, and was only resident in Canada because its CMC was here-if the CMC is moved outside of Canada, it will become a nonresident,
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- Canco was incorporated in Canada, but is continued under the corporate laws of a foreign jurisdiction. Assuming that, after the continuance, its CMC is outside of Canada, it will become nonresident[2], or
- Canco is resident in Canada under the Act, but, under a “tie-breaker” rule in one of Canada’s tax treaties, becomes a resident of another country. If so, it will become a nonresident under the Act[3].
In those situations, Canco will generally be subject to “departure tax” just like any person who ceases to be a Canadian resident[4]. That is, with certain exceptions, assets will be deemed to be disposed of and reacquired at fair market value immediately before the time of emigration.
In addition, Canco’s taxation year will be deemed to have ended immediately before the relevant time. Thus, there is a defined cut-off for when it ceases to be subject to Canadian tax on worldwide income[5].
However, there is also a little-known tax that is applied to emigrating corporations under Part XIV of the Act. That is, under section 219.1 of the Act, there is a tax that is levied at the rate of 25% on the amount by which the fair market value of Canco’s assets exceed the total of its liabilities and the paid-up capital of its stock. In effect, the retained earnings and unrealized gains are subject to the tax that would have been payable under Part XIII if that were paid as a dividend while Canco was resident. Since dividends paid by Canco after emigration will cease to be subject to Part XIII tax, this special tax is intended to prevent the avoidance of a corporate distribution tax by emigrating. In situations where Canco emigrates to a jurisdiction with which Canada has a tax treaty, section 219.3 of the Act generally will reduce the rate of this tax to the Canadian tax rate that would be applied to a dividend paid to a parent corporation resident in that jurisdiction. This rate could be as low as 5% in certain situations.
In certain cases, it would be possible and prudent to effectively defer the payment of tax on Canco’s retained earnings. This could be achieved by transferring the shares in that corporation to a new Canadian parent corporation and distributing all of those retained earnings as an actual or deemed dividend[6] prior to emigration. This would reduce the amount that would be subject to tax under section 219.1 of the Act at the time of emigration.
[1] Subsection 250(4).
[2] As a result of the application of subsection 250(5.1), it will be deemed to have been incorporated in the foreign jurisdiction, and, hence subsection 250(4) will not apply.
[3] Subsection 250(5)
[4] Paragraph 128.1(4)(b)
[5] Paragraph 128.1(4)(a). In contrast, in the case of an individual, other than a trust, this is achieved via special rules in section 114 that apply to part-year residents.
[6] For example, by transferring retained earnings to share capital-see subsection 84(1)
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).
