Written on behalf of Feigenbaum Consulting
A few weeks ago we wrote a blog about how the United States’ Internal Revenue Service (The IRS) is addressing the issue of non-Americans being forced to stay in the United States due to COVID-19, and as a result, running the risk of becoming U.S. residents for income tax purposes. Last week, the Canada Revenue Agency published a memo addressing similar concerns for those running the risk of becoming Canadian residents for income tax purposes.
Income Tax Residency for Individuals
Generally, if a person stays in Canada for 183 days or more in a tax year, that person will be deemed to be a resident in Canada throughout the year. The issue that COVID-19 has created is that some people may have been forced to stay in Canada longer than expected, which would lead to them being classified as residents in Canada for tax purposes.
The CRA’s memo states that when an individual in Canada has remained in Canada solely because of travel restrictions, that factor alone will not cause the CRA to consider the threshold of 183 days to have been met. This exception requires that the individual be a usual resident of another country, to which they intend to return as soon as able.
Income Tax Residency for Corporations
For corporations, Canadian residency is assigned if their “central management and control” is located in Canada. The risk here is that directors of a corporation may be prevented from leaving Canada to return to their normal countries of residency. The CRA noted that in some cases, income tax treaties will address situations of dual residency. However, in cases where a tie-breaker is needed, and that tie-breaker is where the effective management of a business takes place, the CRA will not consider directors unable to travel to their home country to be managing from Canada.
The CRA was careful to note that notwithstanding their position on the location of board meetings, the notion of central management and control of a corporation may include other factors. In these situations, the CRA may consider a corporation to be centrally managed and controlled in Canada even board members who normally reside in Canada are living elsewhere for longer than expected during COVID-19.
Carrying on Business in Canada/Permanent Establishment
The CRA noted that non-residents of Canada are liable to pay tax on their income from “carrying on business in Canada.” Where Canada has tax treaties with other countries, residents of those countries would not be required to pay tax in Canada unless their residency meets the threshold of “permanent establishment” under those treaties.
In these situations, a person might be unable to leave Canada due to COVID-19, therefore meeting that threshold.
Non-residents must still file Canadian income tax in order to claim an exemption to Canadian income tax. However, the CRA stated that as an administrative matter, it will not consider a non-resident to have a permanent establishment in Canada solely because they are unable to return to their ordinary country of residence.
We will continue to cover the COVID-19 responses of both the CRA and the IRS as both Canada and the United States continue to navigate these uncharted waters. In the meantime, it is recommended that individuals and corporations consult with an experienced US and Canadian tax lawyer to help with what can often be complex matters. Contact Feigenbaum Law for a custom solution to your personal tax planning needs. Our team’s unparalleled knowledge of the U.S. and Canadian tax systems make us leaders in this field. Contact us about making your transition across the border as smooth as possible. We offer services to clients in the U.S., Canada and around the world. Contact us online to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.