22 June 1987 Income Tax Severed Letter 7-1779 - [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.

June 22, 1987

Special Audits Division International Transactions Audit Section

Specialty Rulings Directorate A. Jane Tel.: 957-2126

Wayne A. Voege

Residence of a Corporation Application of DeBeers Consolidated Mines Ltd.

XXX

This is in reply to your memorandum of May 6, 1987 addressed to Provincial and International Relations Division regarding the above which was referred to us for reply.

XXX

The taxpayer's claim of Canadian residency status is based on the House of Lords decision of DeBeers Consolidated Mines Ltd. V. Howe (1906) A.C. 455.

You raise the issue of whether the DeBeers case, which holds that a corporation is resident where its real business is carried on, is applicable to a holding company that does not carry on a (real) business. You indicate the consequence of a finding of Canadian residency is that dividends received by the corporation are not subject to Part I tax or to Part XIII tax. Effective January 1985, the corporation for treaty purposes is considered a U.S. resident pursuant to Articles IV(1) and (3) of the Canada-U.S. Income Tax Convention (1980) (the "Convention"). Thus if a wind-up occurred in the U.S. the funds held by the corporation might be distributed tax-free to XXX On the other hand, if the corporation is a U.S. resident Part XIII tax would be exigible on the dividends.

Residency is not defined in the Income Tax Act (the "Act"). The Act contains certain deeming provisions regarding residency; however, with one exception, these provisions are not applicable to the facts at hand and thus one must look to the common law. The DeBeers case is the landmark decision setting out the common law principle for determining the residence of a corporation. Under the common law a company resides where its real business is carried on and the real business is carried on where the central management and control actually abides. Thus the DeBeers ratio presumes a corporation's real business to be carried out where its central management and control lies. This principle strives to determine residency of a corporation as nearly as can be upon the analogy of determining residency of an individual, i.e. a pure question of fact. Just as an individual may be of foreign nationality and yet be resident in Canada if his ties are in fact in Canada, so too a corporation incorporated abroad may be resident in Canada if its central management and control is in fact in Canada.

Our review of the case law indicates that there are no Canadian cases which distinguish the DeBeers case on the basis that it applies only to corporations carrying on an active or "real" business. On the contrary, there have been a few reported decisions regarding residency of holding companies or other passive companies and the DeBeers ratio was applied. Thus the principle of central management and control prevails in these cases. Also it may be observed that the notion of a company's "real" business in the context of determining the residence of a holding company has essentially been extended to include passive functions undertaken to carry out the real purpose of the corporation.

A case in point is Birmount Holdings Limited v The Queen 78 DTC 6254. In that case Mr. M, a resident of France, caused a company to be incorporated in 1960 for the sole purpose of holding one parcel of unimproved land for the future benefit of himself and his family. The company's directors were residents of Canada and they rented the land to a farmer and performed limited administrative tasks such as collecting rent and paying taxes. The Federal Court of Appeal found that the company's central management and control was with the directors who resided in Canada and thus the company was resident in Canada. The "real business" and the "only business" of the company was carried out in Canada where the land was held. The Court noted as a fact that although the company did not have very much business all the business it did have was in Canada.

In Victoria Insurance Company Ltd, v M.N.R. 77 DC 320 the taxpayer was incorporated in the Bahamas Islands by an Ontario public insurance company. The taxpayer was described as a passive off-shore subsidiary created for the purpose of assuming a portion of premiums and risks of the Ontario insurance company so that the latter company could increase its business within the limits imposed by Ontario insurance law. In the first two years the company was controlled by Canadian directors but they were replaced by Bahamian directors. Further it was established that all housekeeping functions and other operations of the company were performed in the Bahamas. Although these functions and operations were described as very passive in nature, the Tax Review Board found that since de facto control was in the Bahamas where the directors resided the company was not resident in Canada.

Based on the foregoing in our view the residence of XXX, for common law purposes is where its central management and control lies. In the absence of some arrangement whereby the directors do not have de facto control and based on the limited facts available and on our understanding that the directors reside and exercise their control in Canada, in our view the company became a resident of Canada under common law principles on January 6, 1984.

Notwithstanding the common law principles of residency, new subsection 250(5) of the Act deems a corporation for purposes of the Act as being not resident in Canada if it is treated for purposes of an income tax convention between Canada and another Contracting state as a resident of the other Contracting State. Since XXX was incorporated in the United States and is considered a resident of the United States effective January 1985 for purposes of the Convention, subsection 250(5) of the Act deems the corporation not to be resident in Canada for purposes of the Act. This subsection applies with respect to Part XIII tax for amounts paid or credited to the corporation after May 9, 1985. Thus dividends paid or credited to the corporation after May 9, 1985 from a corporation resident in Canada are subject to Part XIII tax at the applicable treaty rate. In addition, the corporation is deemed not to be resident in Canada for purposes of computing its income, taxable income earned in Canada and tax payable under Parts I and XIV of the Act for taxation years commencing after May 9, 1985.

for Director, Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch AJ/Jb