Principal Issues: [TaxInterpretations translation] The taxpayer wishes to know the requirements for filing corporate tax returns in Canada and the steps, if any, to be taken to allow the corporation to cease to reside in Canada or to proceed with its continuance. It wishes to know the impact of a winding-up on the retained earnings (RE) balance of the current corporation.
Position: General comments
XXXXXXXXXX 2010-038874
April 4, 2011
Dear Sir,
Subject: Departure from Canada
This is further to your fax of November 29, 2010 and our discussion of last February 16, which indicated that you wish to have our opinion as to the probable departure from Canada of a corporation of which an individual is the sole shareholder.
In summary, you described the situation of an individual who offers, through the individual’s Canadian corporation incorporated after April 26, 1965, computer consulting services. The individual resides (or resided) in Canada and could depart (or has already departed) from Canada to settle in France where the individual is brought by the individual’s work. The individual is the sole shareholder of the corporation. The corporation negotiates directly with its customers and its fees are in Euros.
In particular, you are inquiring as to the potential of migrating the corporation to Europe so that it can file its tax return overseas without a requirement to file a return in Canada. You asked if this migration can occur and, if so, how. In addition, you asked whether it would be better to wind-up the corporation and start over again in Europe, and in such a case, what to do with the retained earnings.
Our Comments
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the “Act").
The situation you described in your letter appears to be related to a factual situation that concerns a specific taxpayer. The Canada Revenue Agency (CRA) does not have a mandate to prepare or provide any tax planning. Furthermore, as explained in Information Circular 70-6R5, when it comes to determining whether a completed transaction has received adequate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. We are, however, prepared to provide the following general comments which we hope will be helpful. These comments are general and may not apply to your particular situation.
Individuals
In Canada, the tax rules are generally based on the taxpayer's residence status. Individuals residing in Canada are taxable on all their income, regardless of its source. They may be eligible for a foreign tax credit if income tax is paid to another country. On the other hand, non-residents of Canada are liable for tax on their Canadian employment income, their Canadian business income and their gains on dispositions of taxable Canadian property. They are also taxable on certain Canadian source income under Part XIII of the Act. It should be noted that a change of residence may have tax implications. An individual who ceases to reside in Canada is deemed at that time to have disposed of the individual’s property at fair market value by virtue of paragraph 128.1(4)(b). There are certain exceptions to that rule, but the shares of a Canadian corporation would generally be deemed to be the subject of a deemed disposition at the time of the termination of residency, which could result in a capital gain or loss. An individual can obtain an opinion on the individual’s residency status in Canada by completing Form NR-73 "Determination of Residency Status". The latter and Information Bulletin IT-221, "Determination of an Individual's Residence Status", are available on our website.
Corporations
A corporation incorporated after April 26, 1965 is deemed to have resided in Canada throughout the year under paragraph 250(4)(a). By virtue of paragraph 150(1)(a), a corporation resident in Canada must file an income tax return in prescribed form by submitting the prescribed information.
The procedures for migrating a corporation to Europe (the continuance of the corporation to another jurisdiction) are not matters of tax law and are not the responsibility of the CRA. We suggest that you check with the appropriate government authorities or obtain the services of a specialized professional in that field. However, we can discuss the tax implications that may arise from the continuance of a corporation. A corporation that is continued may, depending on the circumstances, be considered to have ceased to reside in Canada. Indeed, under subsection 250(5.1), a corporation continued in another country would be considered to be incorporated in the other country from the date of continuance, and would no longer be deemed to be resident in Canada under paragraph 250(4) from that date. If, following its continuance, a corporation ceased to reside in Canada, it would generally no longer be required to file Canadian tax returns for taxation years subsequent to the change of residence (assuming no activity or income from Canadian sources). The change of residence of a corporation may result in tax consequences including the application of subsection 128.1(4). As stated above, this provision provides for the deemed disposition of the property of a taxpayer who ceases to reside in Canada and the end of taxpayer’s fiscal year. In addition, the corporation is subject to a 25% departure tax under section 219.1 for the taxation year that is deemed to have ended as a result of that departure from Canada.
Rather than proceeding with its continuance, the corporation could be wound up. This would potentially result in winding-up dividends under subsection 88(2). If it appears that the shareholder is a non-resident of Canada at the time of payment, the dividends so paid will be subject to Part XIII tax and withholdings of 25% would be required to be made. Withholding may be made at a reduced rate if the shareholder is entitled to the benefits of a tax treaty as a resident of a country with which Canada has such a tax treaty, which provides for such a rate reduction.
In the end, we cannot tell you whether it would be better to proceed with a winding-up rather than a continuance, since tax planning is not within the mandate of the CRA.
Given the complexity of the Act regarding the subject of your request and its scope, the preceding comments are intended only to provide an overview of the applicable provisions and should at no time be considered exhaustive.
These opinions do not constitute advance rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, they do not bind us.
Best regards,
Alain Godin, Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.