14 January 2009 External T.I. 2008-0270771E5 - Residence of a corporation

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Where a particular corporation is resident.

Position: Generally a question of fact. Here both corporations appear to be resident in Canada.

Reasons: Application of subsections 250(4), 250(5) and paragraph 3 of Article 4 of the Canada-US Income Tax Convention.

									2008-027077
XXXXXXXXXX 								Shelley Lewis
(613) 957-2118
January 14, 2009

Dear XXXXXXXXXX :

This is in response to your letter of March 7, 2008 where you inquired as to whether two corporations are resident in Canada for the purposes of section 116 of the Income Tax Act (the "Act").

We have the following understanding of the facts:

A corporation (the "Corporation") was incorporated in Ontario after 1965. The Corporation has three directors. One of the directors of the Corporation is resident in Canada but it is unclear whether the other two directors are resident in the United States or Hong Kong.

The board of the directors do not hold regular meetings and the affairs of the Corporation are usually conducted by way of signing directors' resolutions, where one or more of the directors are signing such resolutions in Hong Kong or United States.

The sole shareholder of the Corporation is a corporation that was incorporated in Ontario after 1965 (the "Shareholder") and it is unclear where the Shareholder's directors' meetings take place.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

The residency of a corporation is determined by a combination of statutory provisions and the common law.

The Act sets out certain deeming provisions in subsections 250(4) to 250(6) of the Act. Pursuant to subsection 250(4) of the Act a corporation that is incorporated in Canada after April 26, 1965 is deemed to be resident in Canada. However, subsection 250(4) is subject to subsection 250(5) which confirms that residence under a tax treaty will prevail. It provides specifically that notwithstanding any other provision of this Act (other than 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.

Due to the potential application of subsection 250(5), in order to determine whether the corporation is resident in Canada it is necessary to look at any applicable tax treaty. Under your facts since Hong Kong does not have a tax treaty with Canada, whether or not the Corporation or the Shareholder is considered resident in Hong Kong under common law principles, will not in and of itself affect the application of the deeming provision in subsection 250(4) of the Act. However, since Canada has a tax treaty with the United States it is necessary to look at the Canada-United States Income Tax Convention (the "US Treaty") to determine if under the US Treaty the Corporation or the Shareholder may be resident in the United States.

Paragraph 1 of Article IV of the US Treaty provides that for the purposes of the US Treaty the term "resident of a Contracting State means any person that, under the laws of that State, is liable to tax therein by reason of that person's domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature...". Since the Corporation and the Shareholder are incorporated in Canada, they are both resident in Canada pursuant to paragraph 1 of Article IV; however, by virtue of some other criterion referred to above, such as the place of management, it may be possible that each is also prima facie considered resident in the United States. Paragraph 3 of Article IV is a tie breaker rule that provides if a corporation is resident in both Canada and the United States, by reason of paragraph 1 of Article IV, the corporation is deemed to be resident in the state in which that it was incorporated. As both the Corporation and the Shareholder were incorporated in Canada, were they otherwise to be resident in the United States under paragraph 1 of Article IV of the US Treaty, paragraph 3 thereof would nevertheless deem them resident in Canada for the purposes of the US Treaty. Consequently, it would appear subsection 250(5) would not override subsection 250(4) in this case and both the Shareholder and the Corporation are resident in Canada for the purposes of the Act. As such, neither the Shareholder nor the Corporation would be required to file a certificate under subsection 116(3) of the Act before the disposition of its property.

We trust these comments are of assistance.

Olli Laurikainen
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch