Under the Income Tax Act, a corporation incorporated in Canada (federally or provincially/territorially) will be deemed to be resident in Canada. A corporation not incorporated in Canada will be considered to be resident in Canada under Canadian common law if its central management and control is exercised in Canada. Where a corporation’s central management and control is exercised is a question of fact, but typically it is where the board of directors meets and makes decisions, provided the board takes action.
A corporation incorporated outside of Canada but with its central management and control situated both in and outside Canada will be deemed to be a non-resident of Canada if it qualifies as a non-resident of Canada under treaty tie-breaker rules.
If a company incorporated in Canada is granted Articles of Continuance in another jurisdiction, the corporation is deemed to have been incorporated in the other jurisdiction and not to have been incorporated in Canada. However, a company incorporated in Canada that is continued into a foreign jurisdiction may still maintain residency in Canada under the common law principles for the determination of residency (i.e. central management and control discussed above). Similarly, a foreign corporation will become resident in Canada if it is continued in Canada or is a predecessor corporation of an amalgamated corporation that is resident in Canada.
Permanent establishment (PE)
Canada's tax treaties generally provide that the business profits of a non-resident corporation are not subject to Canadian tax unless the non-resident corporation carries on business in Canada through a PE situated in Canada and the business profits are attributed to that PE. Canada’s tax treaties may also restrict the imposition of branch tax to situations where the non-resident corporation carries on business in Canada through a PE situated in Canada and/or limit the applicable branch tax rate. While the wording of tax treaties varies, a PE generally is defined as:
- a fixed place of business through which the business of the non-resident corporation is wholly or partly carried on
- a place of management, a branch, an office, a factory, and a workshop; a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; a building site, construction, or assembly project that exists for a specified period, and
- a dependent agent or employee who has and habitually exercises an authority to conclude contracts in the name of the non-resident corporation.
In some circumstances, a Canadian PE may also arise where services are rendered in Canada and certain requirements (e.g. relating to the duration of the services) are met.
The Canadian domestic definition of PE (federal and provincial/territorial) generally mirrors the above.
The interpretation of what constitutes a PE is expected to be re-evaluated in light of the final report issued in 2015 by the OECD and Group of 20 (G20) on Action 7, which is focused on preventing the artificial avoidance of PE status.