Central Management and Control: Your Corporation After You Move

Is my company still Canadian if I move abroad?

Under Canadian law, yes: a corporation incorporated in Canada after April 26, 1965 is deemed resident in Canada, wherever its owner lives (Income Tax Act, s. 250(4)). The risk is the other country. Many countries treat a corporation as resident where it is managed, so a corporation run from abroad can become resident in two countries at once. The tax treaty between them then decides, and a treaty answer that favours the other country makes the corporation non-resident in Canada (CRA: Residency of a corporation).

A non-resident corporation, for Canadian tax, is one neither incorporated in Canada nor centrally managed and controlled here, or one a treaty makes resident only in the other country (s. 250(5)).

Moving abroad does not, on its own, change the corporation's residence under Canadian law. What can change the answer:

• Where decisions are made. Directors meeting and deciding abroad is what usually gives a country that uses a management test a claim.
• The treaty. Each treaty settles a dual-resident corporation its own way: some fix the rule the two tax authorities apply, some leave it to their agreement.
• A continuance. Moving the corporation's legal home to another country ends Canada's incorporation test.
• The value inside. If the corporation is treated as having left, the emigration tax is measured on its net value, so a corporation with large retained earnings or investments has the most at stake.

Gather the articles and any continuance documents, board minutes with where each director was, the list of directors and where each lives, the last T2 returns, and a balance sheet at market values.

A case is not simple if the corporation is now run from abroad, the treaty settles dual residence only by mutual agreement, a continuance is planned, or the corporation holds large retained earnings or investments. Each needs the numbers and the treaty worked through before decisions move abroad.

For CCPC status, withholding on dividends to you and the headline residence answer, see non-resident owners of a Canadian corporation. Whether you yourself are still resident is covered in Canadian tax residency.

What is central management and control in Canada?

Central management and control is the common-law test of where a corporation is resident: the place where its real business decisions are made. The CRA says it is usually where the board of directors meets, and that it is judged by where control is actually exercised, not where the articles or minutes say it should be (CRA: Residency of a corporation).

A sole director who now lives abroad and makes every decision there by email may give the other country a claim under its own rules, whatever the minutes say.

What happens if both countries claim the corporation?

The treaty's residence article decides, and the tie-breaker for corporations is not the same in every treaty. Treaty residence rules override the Income Tax Act when a corporation is resident in both countries (CRA: Residency of a corporation). Read the treaty with the country you moved to; two examples show the range:

The CRA says tie-breakers generally deem a dual-resident corporation resident where it was created. Under that rule, a Canadian corporation generally stays Canadian. Under a mutual-agreement tie-breaker, the answer is uncertain until the two tax authorities agree, and the corporation's management facts carry the weight. Canada adopted the dual-resident-entity rule of a multilateral agreement it signed (the Multilateral Instrument): the two tax authorities settle residence by agreement, looking at the place of effective management and the place of incorporation, and the corporation gets treaty relief only as they agree (Department of Finance: MLI backgrounder). It changes a treaty Canada listed, Japan and Spain among them, unless the other country opted out, so read the current treaty text and, where Finance publishes one, its combined version showing those changes (Department of Finance: Tax treaties). The CRA directs corporations with dual-residency questions to the International Tax Section of its tax services office (CRA: Residency of a corporation).

What does Canada do if the treaty sides with the other country?

Canada deems the corporation not resident in Canada from that time (s. 250(5)), and that counts as ceasing to be resident. Ceasing to be resident triggers the emigration rules in s. 128.1(4):

1. Deemed year-end. The corporation's tax year ends immediately before it ceases to be resident, and a new year begins.
2. Deemed sale of everything. The corporation is deemed to have disposed of each property it owns at fair market value, then to have reacquired it at that value. Gains on investments, goodwill and other property are taxed in Canada on the final return, even though nothing was sold.
3. Emigration tax. A separate tax applies on top, under section 219.1 (next section).

After emigrating, the corporation stays taxable in Canada on some Canadian income, for example business carried on in Canada and certain Canadian-source payments subject to withholding (CRA: Residency of a corporation).

How is the corporate emigration tax calculated?

The emigration tax is 25% of the corporation's net value: the fair market value of all its property immediately before it leaves, minus the paid-up capital of its shares and minus its debts and obligations outstanding at that time (s. 219.1). Amounts owed for dividends do not count as debts.

A treaty can lower the rate. Under s. 219.3, if the treaty with the new country caps the dividend rate a Canadian corporation pays to a parent there that owns all its shares, that capped rate replaces 25%, unless one of the main reasons for becoming resident there was to reduce this tax or withholding tax. When paid-up capital is small, as it often is in owner-managed corporations, almost all of the value net of debts is in the base.

Which returns are due when a corporation emigrates?

A final T2 return for the year that ends at the deemed year-end is due six months after the tax year ends (s. 150). It reports the business income to that date and the gains from the deemed sale. Income tax for that year, including tax on those gains, is due earlier: 2 months after the deemed year-end, or 3 months for a CCPC that claimed the small business deduction and meets the income test (s. 248(1), balance-due day). The section 219.1 emigration tax is payable on or before the same filing-due date (s. 219.1).

After that, the corporation is a non-resident corporation. It may owe Canadian tax on business carried on in Canada, the additional branch tax on that business, and withholding on certain Canadian-source payments it receives (CRA: Residency of a corporation). If earlier years abroad were never filed, see a non-resident-owned corporation that never filed.

How do I keep my corporation's management in Canada?

Make the real decisions in Canada, and keep a record that shows it. The test looks at what actually happens, so paperwork alone cannot keep a corporation Canadian (CRA: Residency of a corporation). Facts that support Canadian management:

• A director who lives in Canada and genuinely takes part in decisions.
• Board meetings held in Canada, with directors physically there for the major decisions: strategy, financing, dividends, large contracts.
• Minutes recording where each director was and who decided, and books and records kept in Canada.
• Major matters not decided by email or call from abroad between meetings.

These facts support Canadian residence; they do not stop the other country applying its own rules. A co-director, a spouse included, who only signs what you decide abroad does not move control to Canada. Corporate-law rules on how many directors must be Canadian residents differ by jurisdiction; see incorporating as a newcomer or non-resident.

What changes if I continue the corporation into another country?

A continuance ends the incorporation test. A corporation granted articles of continuance in another jurisdiction is deemed incorporated there, not in Canada, from that time (s. 250(5.1)). Without a treaty, it stays Canadian-resident only if its central management and control remains in Canada. If it continues into a treaty country, the CRA says tie-breakers generally treat it as resident of that country, even when it is still managed from Canada (CRA: Residency of a corporation). Either way, ceasing to be resident brings the deemed year-end, deemed sale and emigration tax. A continuance is hard to undo; the emigration tax can be estimated before the articles of continuance are filed. Closing the corporation instead is covered in close or keep your corporation.

Example

These examples are illustrative; figures are in Canadian dollars.

A BC consulting corporation run from Tokyo

The sole director of a BC consulting corporation moves to Japan and makes every decision there by email. Canada still deems the corporation resident because it was incorporated in Canada. Suppose Japan also claims it as resident. The Canada–Japan protocol has the two tax authorities settle a dual-resident company by nationality, the country under whose laws it was created, so under the protocol text the expected answer is Canada. If the Multilateral Instrument has replaced that rule for this treaty, the two tax authorities decide instead, and where decisions are made carries the weight. The director confirms the current treaty text before relying on either answer.

An Ontario holding corporation found resident abroad

An Ontario corporation holds investments worth C$900,000, has paid-up capital of C$100 and no other debts. Under its treaty, it is found resident only in the other country. It has a deemed year-end and a deemed sale of the investments, with gains taxed on the final T2. The emigration tax base is at most about C$900,000 (C$900,000 − C$100), so the tax is at most about C$225,000 at the statutory rate, before any treaty reduction under section 219.3. Income tax owing for the final year may count as an outstanding obligation and lower the base.

A Canadian co-director and board meetings in Canada

An owner moves abroad but keeps a co-director who lives in Canada and takes part in decisions. Major decisions are made at board meetings held in Canada, and the minutes record who attended and where. That factual record supports Canadian central management and control.

Different for you?

• Your corporation has large retained earnings or investments and you now run it from abroad: the emigration tax and deemed sale could be large; get corporate tax help before decisions move abroad.
• The other country has claimed your corporation as its resident, or the treaty uses mutual agreement: get corporate tax help with the facts and the treaty position.
• You are thinking of continuing the corporation into another country: the emigration tax is worked out before the articles are filed; get corporate tax help with a market-value balance sheet.
• You are thinking of closing it instead: compare the options in close or keep your corporation.
• You want to take money out of the corporation from abroad: see paying yourself after moving abroad.
• T2 returns were missed while you were abroad: see a non-resident-owned corporation that never filed.
• You are moving between Canada and the United States: see moving across the border with a company.