2021-0912111C6 2021 CTF –Q4- Liable To Tax & Territorial Taxation

Principal Issues: Whether a non-resident corporation can be considered to be resident of a foreign jurisdiction (e.g. Singapore) with which Canada has a Tax Treaty, where that jurisdiction has a territorial system of taxation?

Position: Yes, the decision must be made on a case by case basis.

Author: Roulier, Yannick
Section: Article IV of a Tax Treaty.

2021 CTF Annual Conference
CRA Roundtable

Question 4: Liable to Tax and Territorial Taxation

In order to qualify for the benefits under an income tax convention agreed upon by the Government of Canada and the government of a foreign jurisdiction (a “Tax Treaty”), a person must generally be considered a resident of a “Contracting State” for the purposes of the relevant Tax Treaty. Treaty residence of a taxpayer’s foreign affiliate is also generally relevant in the context of the computation of the foreign affiliate’s surplus accounts in respect of the taxpayer to support the claim by that taxpayer of certain deductions under subsection 113(1). Generally, a person must be “liable to tax” in a “Contracting State” by virtue of a criterion referred to in the residence article of the relevant Tax Treaty in order to be considered a resident of that foreign jurisdiction for the purposes of the treaty.

It has been the long-standing position of the CRA that, to be considered “liable to tax” for the purposes of the residence article of a Tax Treaty, a person must be subject to the most comprehensive form of taxation as exists in the relevant foreign jurisdiction. This generally refers to full tax liability on worldwide income.

When it comes to applying the concept of “liable to tax” in the context where the foreign jurisdiction taxes on a territorial basis, the CRA has stated the following in the past:

“In order to qualify as a resident [of a] contracting state which has territorial tax system, a taxpayer will generally have to be subject to as comprehensive a tax liability as is imposed by the particular state.” (see document 9822230)

Can the CRA provide additional guidance in respect of that determination?

CRA Response

It should generally be recognized that in determining the residence status of a person for the purposes of a Tax Treaty, each situation should be decided on its own particular facts. That determination should be done keeping in mind the intention of the Contracting States to the Tax Treaty.

That determination turns on whether a person can be considered to be “liable to tax” in a foreign jurisdiction by reason of its “domicile, residence, place of management or any other criterion of a similar nature”, as generally stated under the relevant provision of the Tax Treaty. Additional interpretative issues arise in respect of jurisdictions that have a remittance and/or territorial tax system, as the status of residence may not be relevant in order to determine the extent to which a person is “liable to tax” under the tax law of those jurisdictions.

The resolution of such interpretative issues requires a textual, contextual and purposive analysis of the relevant provisions of the applicable Tax Treaty, in light of the applicable foreign tax legislation, as well as secondary authoritative sources, including for example the Organisation for Economic Cooperation and Development relevant Model Tax Convention and its Commentary.

The CRA recently had to consider the issue in respect of a particular corporation established under the law of Singapore, where a form of territorial tax system applies. That system relies on “source-based taxation” in respect of income from a source in that jurisdiction and on “remittance-based taxation” for foreign-source income. In that particular case, the corporation was considered to be a resident of Singapore for the purposes of the Canada-Singapore Tax Treaty, provided that its central management and control was at all relevant times exercised in that jurisdiction.

As mentioned above, it should be noted that the determination of the treaty residence of a person is to be determined on a case-by-case basis. Taxpayers may wish to request an advance income tax ruling from the Income Tax Rulings Directorate if they are contemplating transactions involving foreign entities whose residency under the particular treaty may be unclear.

Yannick Roulier
2021-091211
November 25, 2021

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