Implications Of COVID-19 For Corporate Residency

• Published date: 04 June 2020
• Author: Mr Christopher Steeves and Devon LaBuik
• Subject Matter: Corporate/Commercial Law, Tax, Coronavirus (COVID-19), Corporate and Company Law, Directors and Officers, Income Tax, Financing, Operational Impacts and Strategy
• Law Firm: Fasken

Overview

The COVID-19 pandemic has created many changes for corporate management throughout Canada. In the past, directors often traveled outside of Canada for purposes of attending board meetings in foreign jurisdictions. Directors often made such travel arrangements in order to maintain a corporation's residency outside of Canada for tax purposes. However, the ongoing COVID-19 pandemic has significantly restricted directors' abilities to travel abroad and, in turn, attend meetings in foreign jurisdictions.

Directors have, in response, created alternative local or "virtual" arrangements (i.e. video or teleconferencing) for such meetings. However, these arrangements may have potentially significant income tax consequences for a corporate taxpayer. This bulletin will briefly address some of these consequences:

General Principles of Residency

The Income Tax Act (Canada)¹ (the "ITA") imposes tax on corporations resident in Canada. The Courts generally determine a corporation's residency by applying the common law test of "central management and control". The test provides that a corporation is resident in the country where its central management and control is exercised. This is generally the country where the directors of the corporation exercise their responsibilities.² It should also be noted that a corporation may be resident in one or more different countries (e.g. the directors may be exercising their responsibilities in multiple different countries).³

The Courts examine a number of factors for purposes of determining whether a corporation's directors exercise their responsibilities in a particular country, including the location of board of directors meetings. As noted above, directors of corporations, especially foreign subsidiaries of Canadian entities, often arrange board meetings in foreign jurisdictions for purposes of exercising their responsibilities outside of Canada and maintaining a corporation's non-resident status (i.e. not resident in Canada). Directors may travel to one or multiple jurisdictions for purposes of attending these meetings.

COVID-19 Implications for Residency

It is unlikely that directors will be able to travel to foreign jurisdictions in the foreseeable future. As a result, directors may decide to hold and attend "virtual" board meetings- i.e. meetings over the phone or a video platform. These virtual meetings certainly facilitate the decision-making process.

However, such meetings may inadvertently cause a corporation to become resident in Canada. For example, consider a set of circumstances in which all directors of a (normally) non-resident corporation live in Canada. These directors are working from home as a result of the COVID-19 pandemic. The directors decide to hold and attend regular board meetings on a video platform from March to December, 2020. The directors make various important decisions at such meetings. However, the directors have, by attending the virtual meetings, effectively...