Principal Issues: [TaxInterpretations translation] 1. Does a corporation whose head office moves outside Canada have to file a T2?
2. Is the corporation still eligible for the investment tax credit for research done in Canada?
Position: 1. It must be determined whether the corporation is resident or deemed to be resident in Canada or whether the corporation is resident in another country or deemed to be non-resident in Canada. Regardless of the answer, it will have to file a T2. If the corporation is resident or deemed resident in Canada, it will include its global income and expenses on the T2. If the corporation is a non-resident, it will have to include, inter alia, its business income earned in Canada unless a tax treaty contains relief provisions.
2. If the corporation is resident or deemed to be resident in Canada, its Part I tax may be reduced by the investment tax credit if it satisfies the conditions entitling it to such a credit. If the corporation is a non-resident or deemed non-resident of Canada, its Part I tax may be reduced by the investment tax credit if it carries on a business in Canada, the research is related to that business and the conditions giving it entitlement to the credit are satisfied.
Reasons: 1. Provisions of the Act. See T2 guide.
2. Provisions of the Act. See IT-151R5.
XXXXXXXXXX 2008-027483 Sylvie Labarre, CA November 3, 2008
Dear Sir,
Subject: Change of control and relocation of a corporation's registered office
This is in response to your letter of May 9, 2008, regarding the acquisition by a non-resident corporation of shares of a corporation incorporated in Canada and the relocation of its head office outside Canada. We apologize for the delay in responding to this request.
A corporation was incorporated in Canada in 2005 and was majority-owned by an individual resident in Canada. The corporation carries on a development, manufacturing, and sales business in XXXXXXXXXX. The corporation incurred losses in its first two fiscal years but expects to be profitable in its current taxation year. The majority shareholder plans to sell its shares in the corporation to a non-resident corporation formed in XXXXXXXXXX. The corporation's head office would relocate to XXXXXXXXXX where the sales and administration operations would take place. Research and development and manufacturing operations would be carried out in Canada. No sales or revenues would be realized by the Canadian manufacturing division.
You asked if the corporation should file a T2 income tax return following the change of control and the relocation of the head office and what income and expenses should be included.
You also wish to know if the corporation will still be able to claim investment tax credits for its research and development activities.
You would also like to know about other important tax considerations related to this project.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. In addition, when determining whether a completed transaction has received adequate tax treatment, the decision is first made by our Tax Services Offices following a review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope you will find useful. These comments, however, may not apply to your particular situation in certain circumstances.
A change of control generally results in a deemed year-end and the application of the rules in subsections 111(4) to 111(5.5) of the Income Tax Act (the "Act"), which may restrict the deductibility of losses incurred before the change of control. In addition, if a non-resident person acquires control of the corporation, the corporation will not be able to be a Canadian-controlled private corporation, which could result in certain consequences for the corporation (such as its tax rate) and for its shareholders.
Furthermore, it must be determined whether the corporation is still resident in Canada for purposes of the Act as a result of the relocation of the head office. If the corporation becomes a non-resident of Canada for purposes of the Act, subsection 128.1(4) of the Act will apply, causing a deemed fiscal period end and a deemed disposition of certain property.
In determining a corporation's residency for the purposes of the Act, the "common law" rules and deeming provisions contained in the Act must be considered.
Paragraphs 15 and 16 of Interpretation Bulletin IT-391R (the "Bulletin") state the following with respect to the residence of a corporation.
15. The common law has generally established that a corporation is resident in the country in which its central management and control is exercised (DeBeers Consolidated Mines Limited v. Howe, (1906) A.C. 455). Usually management and control exists where the members of the Board of Directors meet and hold their meetings. However, if the Board of Directors of a company does not in fact exercise its powers, and the management and control of the company is actually exercised by some other party, such as the directors of its parent company or its principal shareholder, who are resident in another country, the company will be resident in that other country (Unit Construction Co. Limited v. Bullock, (1960) A.C. 351).
16. If a corporation is not resident in Canada by virtue of the central management and control test discussed in 15 above, it may nevertheless be resident in Canada by virtue of the deeming provisions in subsection 250(4).
Thus, as stated in paragraph 16 of the Bulletin, subsection 250(4) provides, inter alia, that a corporation incorporated in Canada after April 26, 1965 is deemed to have been resident in Canada throughout a taxation year.
According to the information you have provided, central management and control may be exercised in XXXXXXXXXXX. This is a question of fact and more information would be required to reach a definitive conclusion. On the other hand, you informed us that the corporation was incorporated in Canada in 2005. A corporation incorporated in Canada in 2005 would be deemed to be resident in Canada by virtue of subsection 250(4) even if its central management and control is not in Canada unless subsection 250(5) applies.
Thus, notwithstanding the presumption in subsection 250(4), the corporation incorporated in Canada in 2005 may instead be deemed not to be resident in Canada because of subsection 250(5). This would occur if, under a tax treaty with another country, it is resident in the other country and not resident in Canada. The information you gave us is not enough to determine whether this is the case.
A corporation that would be resident in Canada under the common law tests or that would be deemed resident in Canada by virtue of subsection 250(4) (and to which subsection 250(5) does not apply) would be required to file a T2 income tax return and to include its global income and expenses on that return. The corporation may be entitled to a foreign tax credit if it has paid foreign tax in respect of its foreign income. In addition, in order to be able to reduce its Part I tax by an investment tax credit for its research and development expenses, the corporation would be required to satisfy the conditions provided for in the Act in this regard in the same manner as before. Furthermore, the rate of the investment tax credit could be different if the corporation was, prior to the change of control, a Canadian-controlled private corporation. Similarly, a corporation that is no longer a Canadian-controlled private corporation is no longer entitled to the refundable investment tax credit.
As stated in the 2007 T2 Corporation Income Tax Guide, a corporation deemed to be a non-resident of Canada under subsection 250(5) of the Act will be required to file a T2 return if it is in one of the following situations during the year:
- it carried on business in Canada;
- it had a taxable capital gain; or
- it disposed of taxable Canadian property.
Subject to the tax treaty between Canada and the corporation's country of residence, the non-resident corporation would be required to pay tax on certain income or gains including income from businesses carried on by it in Canada. In this regard, paragraph 4(1)(b) of the Act provides for the manner of calculating the portion of business income carried on in Canada by stating that where the business carried on by a taxpayer was carried on partly in one place and partly in another place, the taxpayer’s income or loss for the taxation year from the business carried on by the taxpayer in a particular place is the taxpayer’s income or loss computed in accordance with the Act on the assumption that the taxpayer had during the taxation year no income or loss except from the part of the business that was carried on in that particular place and was allowed no deductions in computing the taxpayer’s income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that part of the business and except such part of any other deductions as may reasonably be regarded as applicable to that part of the business.
Paragraph 4(1)(b) effectively requires a non-resident corporation to allocate its profits between Canada and another country in a manner that reflects the contribution to profits of the activities of each jurisdiction. The Act does not contain a more detailed methodology than paragraph 4(1)(b) of the Act for allocating profits between jurisdictions. However, even if sales are made from the head office, much of the revenue will be allocated to Canada as a result of development and manufacturing operations. You may find useful information for calculating the portion of the income and expenses of the business carried on in Canada in the Commentary on Article 7 of the 2008 OECD Model Tax Convention.
The provisions of the tax treaty between Canada and the country of residence of a corporation that would be a non-resident of Canada by reason of subsection 250(5) should also be examined to determine whether the treaty contains any relieving measures with respect to the taxation of income from a business carried on in Canada or with respect to other income that is taxable in Canada under the Act. A non-resident corporation would be required to file a T2 return even if it claimed an exemption from Canadian tax under a tax treaty on all profits and gains. You can refer to the T2 Guide for details on the lines to complete on the T2 and the non-resident corporation must complete and attach Schedule 91, Information Concerning Claims for Treaty-Based Exemptions.
Furthermore, a non-resident corporation's Part I tax could be reduced by an investment tax credit for research and development expenses incurred in Canada if the corporation carries on business in Canada, the research is related to that business and the corporation satisfies the conditions provided in the Act for claiming such a credit. As previously stated, the rate of the investment tax credit could be different if the corporation was, prior to the change of control, a Canadian-controlled private corporation, and the corporation would no longer be entitled to the refundable investment tax credit.
We hope that these comments will be of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.