9 June 2020
The Canada Revenue Agency has published Guidance on international income tax issues raised by the COVID-19 crisis. The guidance includes the Agency's positions on:
Some of the key position provided in the guidance are as follows:
Individual Income Tax Residency
Where the individual has remained in Canada solely because of the Travel Restrictions, that factor alone will not cause the Agency to consider the common-law factual test of residency to be met. In addition, as an administrative matter and in light of these extraordinary circumstances, the Agency will not consider the days during which an individual is present in Canada and is unable to return to their country of residence solely as a result of the Travel Restrictions to count towards the 183-day limit for deemed residency. This will be the Agency position where, among other things, the individual is usually a resident of another country and intends to return, and does in fact return, to his or her country of residence as soon as he or she is able to do so.
Corporation Income Tax Residency
Some of Canada's income tax treaties will address the situation of the dual residency of a corporation by determining the corporation to be resident in the country under whose laws it was created. For example, where the corporation is an entity created under the laws of the United States as a "C-corporation" or "S-corporation", the Agency expects that the corporate residency tie-breaker rule contained in Article IV of the Canada-United States income tax treaty will address this issue.
Other tax treaties contain a residency tie-breaker rule that looks to the corporation's place of effective management, among other factors. For corporations covered by such income tax treaties, in light of the extraordinary circumstances resulting from the Travel Restrictions, as an administrative matter, where a director of a corporation must participate in a board meeting from Canada because of the Travel Restrictions, the Agency will not consider the corporation to become resident in Canada solely for that reason.
Determinations of corporate residency involving potential dual residency with non-treaty countries will be determined on a case-by-case basis.
This administrative approach will also be followed in respect of other entities established in foreign jurisdictions that are considered corporations under Canadian income tax law, such as limited liability companies. In addition, where appropriate, the Agency will consider adopting a similar approach in determining the residency of a commercial trust.
It is important to note that, notwithstanding that our comments above concentrate on the location of board meetings, there is more to where central management and control of a corporation, or where place of effective management (for income tax treaty purposes) is located than the location of board meetings. The determination of the central management and control of a corporation is based on a number of factors, of which the location of board meetings is only one element. Similarly, the location of board meetings is also only one element in determining the location of a corporation's place of effective management. The Agency may still conclude that a corporation is resident in Canada where the actual management and control of the corporation takes place in Canada even though the board meetings have taken place elsewhere.
Carrying on Business in Canada/Permanent Establishment
Non-resident entities that are resident in a jurisdiction with which Canada has an income tax treaty and that are carrying on business in Canada but whose activities in Canada do not meet the threshold of permanent establishment are required to file a return for that year in order to claim an exemption from Canadian income tax. This filing obligation continues to apply in respect of tax years of non-resident entities that overlap with the period while the Travel Restrictions are in place.
However, as an administrative matter and in light of the extraordinary circumstances resulting from the Travel Restrictions, the Agency will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their employment duties in Canada solely as a result of the Travel Restrictions being in force. Similarly, the Agency will not consider an "agency" permanent establishment to have been created for the non-resident entity solely due to a dependent agent concluding contracts in Canada on behalf of the non-resident entity while the Travel Restrictions are in force, provided that such activities are limited to that period and would not have been performed in Canada but for the Travel Restrictions.
Where Canada has not entered into an income tax treaty with the country in which the non-resident entity is resident, if the non-resident entity carries on business in Canada, it is required to file a return for that year, and if it can be demonstrated to the Agency that the non-resident entity has satisfied the Canadian income tax threshold of "carrying on business in Canada" only because of the Travel Restrictions, the Agency will consider whether administrative relief is appropriate on a case-by-case basis.
Finally, the Agency will exclude, in determining whether an individual meets the 183-day presence test in a "services permanent establishment" provision of Canada's tax treaties (such as Article V(9)(a) of the Canada-United States income tax treaty), any days of physical presence in Canada due solely to Travel Restrictions.
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