Written by Alec Colwell
JD Candidate | UCalgary Law
While corporate residency may not be a primary concern for many businesses, it may be prudent for individuals involved in start-ups that have become profitable to consider the prospect of double taxation. This issue could be more relevant for smaller corporations where “central management and control” may be vested in just one founder or a significantly smaller board of directors. In such cases, if a few key individuals opt to relocate and conduct their business activities in a jurisdiction outside the one they have incorporated, they may encounter unexpected tax consequences.
Under subsection 2(1) of the Canadian Income Tax Act (the “Act”), income tax must be paid on the taxable income of every person that is resident in Canada. The Act provides that a corporation is a person and a taxpayer. A corporation is deemed to be a resident if it was incorporated in Canada after April 26, 1965, or incorporated in Canada before April 27, 1965, and was resident or carried on business in Canada after April 26, 1965.
What this all means is that when you incorporate a business in Canada, that business will be resident in Canada, and its profits will be taxable. This is expected and seems quite reasonable to most. However, the deeming provisions of the Act are not the only way that a corporation can be found to be a resident of Canada. Under common law, a corporation is resident where its “central management and control” is located.
Generally, “central management and control” is where the members of the board of directors meet and hold their meetings. In practical terms, this would mean that if the majority of a non-Canadian business’ board of directors were to relocate to Canada and conduct their business in Canada, the business could be considered to be a resident of both its originating jurisdiction under that jurisdiction’s laws and a resident of Canada under the common law. This could lead to the unexpected issue of being subject to tax in a jurisdiction different than the one in which a business is incorporated and operating, or, even worse, becoming the victim of double taxation.
In an effort to relieve the issue of double taxation, Canada has negotiated tax treaties with many countries. Within these tax treaties are tie-breaker rules that determine which contracting state should be the state that receives the tax payments for the year. While this mechanism will offer relief in many situations where a corporation would otherwise be subject to double taxation, it is not a perfect solution. For example, the Canada-U.S. Tax Treaty, in general terms, stipulates that the tiebreaker will be the jurisdiction of incorporation. This is a relatively simple rule and, in clear cases, will result in the corporation being taxed in only one jurisdiction. However, the treaty also provides, in the case that neither jurisdiction is the jurisdiction of incorporation, “the competent authorities of the Contracting States shall endeavour to settle the question of residency by mutual agreement and determine the mode of application of this Convention to the company.” This situation is less than ideal as it could lead to an unexpected tax outcome. Additionally, the wording in the convention, that the parties shall endeavour to mutually agree, rather than that they must come to a mutual agreement is troubling. It leaves open the possibility that, in the absence of such mutual agreement, the contracting states may both tax the taxpayer and offer no relief from double taxation.
Furthermore, not all tax treaties have a clear first tie-breaker rule as in the Canada-US tax treaty. For example, the Canadian-Mexico tax treaty tie-breaker rules state that “[w]here by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person. In the absence of such agreement, such person shall not be entitled to claim any relief or exemption from tax provided by the Convention.” Here, the convention explicitly states that a mutual agreement does not need to be reached and, in that event, the taxpayer will have no relief from double taxation.
One final issue to consider is that, while Canada currently has tax treaties with many countries, there are still a significant amount of countries with which a treaty is not in place. Some examples of countries that Canada does not have a tax treaty with include Andorra, Fiji, and Monaco.
In light of potential unanticipated residency issues, entrepreneurs and small business owners should be aware of the corporate residency laws and tax treaty regulations of any jurisdiction in which they are planning to manage the affairs of their Canadian-incorporated business.
 Income Tax Ac, RSC 1985, c 1 (5th Supp) [ITA].
 Ibid at ss 248(1).
 Ibid at para 250(4)(c).
 De Beers Consolidated Mines Limited v Howe  AC 455 (HL).
 Fundy Settlement v Canada, 2012 SCC 14 at para 9.
 The Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed at Washington, DC on September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and September 21, 2007, at Article IV (3)(a) of the Canada-US tax treaty.
 Ibid at Article IV (3)(b)
 Convention Between the Government of Canada and the Government of the United Mexican States, signed at Mexico City, Mexico, on September 12, 2006, at Article 4 (3) of the Canada-Mexico tax treaty.
 Department of Finance Canada, Tax treaties, (last modified 29 August 2019), online: <https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties.html>
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.