Determining Place of Residency

A monthly feature focusing on current issues in commodity taxation, edited by Michael Firth of PricewaterhouseCoopers LLP, Brent F. Murray of Wilson & Partners LLP, and Sheila Wisner of CCH Canadian Limited.

From a GST/HST perspective, the issue of whether a person is a resident of Canada is important for a number of reasons including: (i) the zero-rating provisions in the Excise Tax Act (“ETA”) for supplies made to a non-resident; (ii) the self-assessment rules for imported taxable supplies; and (iii) the non-resident override rule in section 143 of the ETA for supplies made by a non-resident.

The determination of residency is of concern, not only for an entity trying to determine if it is a resident, but also for any supplier making supplies to entities that may be non-residents of Canada. For example, with the zero-rating provisions, if a supplier accepts a customer’s assertion of non-resident status, the supplier will conclude that a supply is zero-rated and not collect GST/HST. What if, through no intentional wrongdoing, the customer is wrong? At the end of the day, upon audit, if it is determined that the customer is a resident, so the zero-rating provisions do not apply, it is the supplier that will receive an assessment. Hence, a degree of diligence and awareness around the residency status of a business’s customers is prudent.

The definition of “non-resident” in subsection 123(1) of the ETA merely references a person that is “not resident in Canada”, but the term “resident” is not defined. Depending on the type of “person” involved, section 132 of the ETA may deem a person to be resident in Canada. For example, a corporation will be deemed to be resident in Canada if it is incorporated in Canada; whereas a partnership will be deemed to be resident in Canada if the majority of controlling members are residents of Canada. In situations where a person has a permanent establishment in Canada, subsection 132(2) of the ETA deems the person to be resident in Canada in respect of the activities undertaken through the permanent establishment in Canada. If these deeming rules do not apply, a person may still be a resident of Canada under the common law tests of residency. This article provides a high-level overview of the common law principles which may result in a person being considered a resident of Canada.

Common Law Test of Residency

The common law test of residency has been derived from English tax jurisprudence and is based on the “central management and control test”. Under this test, a business is considered to be resident where its “central management and control” abides. It is generally considered that the jurisprudential authority for the central management and control test is the House of Lords decision in De Beers Consolidated Mines Ltd. v. Howe (Surveyor of Taxes), [1906] AC 455 (KB Div, CA, HL). In that case, it was said that a corporation could be found to reside “where its real business is carried on” and that “the real business is carried on where the central management and control actually abides”. On a number of occasions, Canadian courts have adopted the central management and control test as the basis for determining the residence of a corporation, with the Federal Court of Appeal stating the following in Birmount Holdings Ltd v. The Queen, 78 DTC 6254, (at paragraph 29):

I will deal initially with the question as to whether, on the evidence adduced in this case, the appellant could be said to be resident in Canada in fact. The established rule at common law so far as the residence of a company is concerned was clearly enunciated by Lord Loreburn in the De Beers case . . . where he stated that a company resides for income tax purposes where its real business is carried on and the real business is carried on where ‘ . . . the central management and control . . . ‘ actually abides.

In St. Michael Trust Corp. (appeal to the Supreme Court pending) the Federal Court of Appeal has affirmed that “the judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate”, and that the residency of a trust is not determined solely based on the residency of the trustee, but rather, the location where central management and control resides note 1. Like a trust, a “partnership” is not a separate person at common law as it is merely a certain type of relationship; however, by definition a partnership is a “person” for GST purposes. Based on the following reasoning in St. Michael Trust Corp., there does not appear to be any reason why the “central management and control” test would not apply to determine whether a partnership was resident in Canada for GST purposes:

St. Michael Trust Corp. argues that a test of central management and control cannot be applied to a trust because a trust is a “legal relationship” without a separate legal personality. I do not accept this argument. It is true that as a matter of law a trust is not a person, but it is also true that for income tax purposes, a trust is treated as though it were a person. In my view, it is consistent with that implicit statutory fiction to recognize that the residence of a trust may not always be determined by the residence of its trustee.

Location of Central Management and Control

As discussed in St. Michael Trust Corp., determining the residency of a person requires a “fact driven analysis with a view to determining the place where central management and control” of the particular person is actually exercised. In understanding how to apply the central management and control test to a particular person, it is useful to understand what the Court said in De Beers. The issue in De Beers was whether De Beers Consolidated Mines Ltd. (“De Beers”) was a resident of the United Kingdom for U.K. tax purposes. De Beers was a company that was registered in South Africa and was in the business of mining for diamonds. De Beers owned mines in South Africa and its head office was in South Africa. In holding that De Beers was a resident of the United Kingdom, there were two majority decisions written, one written by Lord Loreburn and the other written by Lord James. Lord Loreburn first rejected a test of corporate residence based on the place of incorporation preferring instead to proceed, as nearly as he could, upon an analogy of an individual, stating:

In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business.

Lord Loreburn went on to consider how to determine where a company really keeps house and does business, stating: that the “real business is carried on” where “the central management and control actually abides”:

We ought, therefore, to see where it really keeps house and does business. . . . The decision of Kelly, CB, and Huddleston, B, in Calcutta Jute Mills v Nicholson and Cesena Sulphur Company v Nicholson (1876, 35 LT 275; 1 Ex D 428), now 30 years ago, involved the principle that a company resides, for purposes of income tax, where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule; and the real business is carried on where the central management and control actually abides.

In Lord James’s decision, he concurred with Lord Loreburn’s judgment and also specifically rejected the place of registration as an appropriate test for determining corporate residence. The reference in De Beers to the location where the “central management and control actually abides” has been extensively interpreted in jurisprudence and commentary. As explained in Corporate Residence and International Taxation note 2, the result appears to be that the central management and control of a business does not reside where management and control of the daily business is undertaken; but rather, at the location where management and control of the business’s vital and strategic functions takes place:

Secondly, the Lord Chancellor in De Beers focused our attention on an attribute that relates neither to the daily conduct of the business nor to the ultimate voting control of the corporate entity. Note that “management” and “control” in his formula are joined by the conjunctive “and”, and followed by the singular verb “abides”. “Management and control” is expressed as unitary and must be located collectively. The isolated word “management” might refer to the conduct of the business by executives and “control” to the power of shareholders to exercise their voting rights to elect the directors and decide upon fundamental aspects of the corporation’s constitution. Lord Loreburn’s “management and control” is a composite test and, properly construed, cannot be understood to refer to either day-to-day running of the business or the voting power of shareholders. Although not prepared to establish any single and immutable rule for locating the management and control, the Lord Chancellor did articulate a test that seems particularly apt, at least in most cases, to point to the board of directors. Under English company law the directors, as a board, are charged with the management and control of the affairs of the corporation.
(emphasis added and footnotes omitted)

Finding central management and control to be exercised by a higher or paramount authority such as the directors of a corporation is also reflected in the decision in Tara Exploration v. MNR, 70 DTC 6370, where the Court held that the significant administrative functions being carried out in Canada were not sufficient to support residency in Canada. This case involved a corporation that was incorporated in Ontario where it raised capital for the purpose of carrying on business in Ireland. The company acquired a new Canadian subsidiary to develop an Irish mining property and later sold the shares of the subsidiary at a profit. In determining that the company was not liable for Canadian taxes in respect of the operation in Ireland, the Court held that the company was resident in Ireland as its central management and control was in Ireland, based on the general manager and other active officers being resident in Ireland and having their head offices in Ireland and the directors and corporate officers living in Ireland. The Court came to this conclusion despite the fact that (i) the head office was in Toronto together with the corporate books; (ii) certain corporate meetings were held in Toronto; (iii) it received and made payments in Canada; (iv) it had a bank account in Canada; (v) its directors and officers came to Canada on occasion on the company’s business; (vi) it raised capital in Canada and used the services of Canadian solicitors and auditors; and (vii) it embarked on certain business adventures in Canada.

The location where central management and control is situated is not necessarily where day-to-day activities are undertaken. Rather, it is the place where decisions of a strategic or policy nature are being made. For example, in Laerstate BV v. Commissioners of Inland Revenue, [2009] UKFTT 209 (TC), the Tribunal expressly referred to the place where strategic and management decisions were made:

We have found that Mr Bock’s activities as a director of the appellant in the UK went much further than ministerial matters or matters of good housekeeping. His activities in the UK as a director of the appellant were certainly concerned with policy, strategic and management matters, and, we have found, included decision-making in relation to the appellant’s business in this period.

Similarly, in American Thread the House of Lords referred to supervising and making policy decisions when determining who exercised the paramount authority, stating as follows:note 3

. . . But it is clear that the Directorate in Manchester was a Directorate of paramount authority, as is shown not only by the fact that the reserved subjects are kept for them in Extraordinary Session, but by this, that, as the Commissioners found, they were constantly supervising and guiding the policy of the Company, even as regards matters which belonged to manufacture and trading. (emphasis added)

With respect to the residency of a trust, the Federal Court of Appeal in St. Michael Trust Corp. relied on the following facts in concluding that the central management and control of the trusts resided in Canada, as this was where the “substantive decisions” respecting the trusts were being made:

(i) Canadian residents had the authority to replace the trustee if it acted against their wishes;

(ii) The non-resident trustee had limited powers, with no decision-making role in relation to disposing of investments, the investment of proceeds, or making distributions (rather, these decisions were made by Canadian residents);

(iii) Canadian-resident beneficiaries of the trust had direct control over the trust’s investment activity without any involvement from the non-resident trustee;

(iv) Tax advisers for the trusts were directed by Canadian residents;

(v) There was no documentary evidence which established any active role by the non-resident trustee in managing the trust;

(vi) The non-resident trustee had no expertise in managing trust assets; and

(vii) The trustee was essentially required to rubber-stamp the actions of the trust in that the trustee had very little information about transactions that it was required to ratify.

With respect to corporate entities, the location where the directors’ meetings are held is generally where decisions of a strategic and policy nature are made, since the corporation’s governing legislation generally requires the directors to make decisions of that nature note 4. However, there can be situations where a third party (such as a controlling shareholder) has taken over and usurped the central management and control. For example, in Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes), [1959] 3 All ER 831, the House of Lords found that central management and control was not located at the place where the board of directors met as central management and control had been usurped from the subsidiary’s directors and taken over by the parent corporation. This principle was recently explained in St. Michael Trust Corp. by the Federal Court of Appeal as follows:

However, that may not be the result if the facts disclose that the corporation is not in fact managed and controlled as its governing law requires. In that regard it is relevant to consider the nature of the decision making authority actually exercised by the directors. If significant management decisions are in fact taken by a person who is not a director, the place where that person resides or operates may be determined to be the residence of the corporation. Thus, for example, if it is established that management and control is exercised in fact by a shareholder operating out of another country, the corporation may be found to be resident where the shareholder resides: see United Construction Co. v. Bullock (Inspector of Taxes) (1959), [1960] A.C. 351 (Eng. C.A.). (emphasis added)

It is important for businesses to understand that the issue of whether a person is a “non-resident” is not always easy to determine. The answer to the question ultimately depends on the particular facts and the location where policy, management, and strategic decisions are being made. For this reason, as discussed in GST Memorandum 4.5.1, in situations where the supplier is relying on the zero-rating provisions for supplies made to a non-resident, the supplier is strongly encouraged to obtain a declaration from the recipient which certifies that the recipient is in fact a non-resident. The supplier should also make attempts to reasonably satisfy itself that the declaration is in fact true.

–Brent Murray, Wilson & Partners LLP

Notes:
1. St. Michael Trust Corp v. The Queen, 2010 FCA 309 (paragraphs 57 to 59), as follows: “There is very little jurisprudence relating to the determination of the residence of a trust for tax purposes. Justice Woods reviewed the jurisprudence and concluded, correctly in my view, that there is no case law establishing a single test for determining the residence of a trust. She also concluded that “the judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate” (reasons, paragraph 162). I agree with her, substantially for the reasons she gave. . . . However, no case has established that the residence of the trustee is an invariable legal test for the residence of the trust. Nor has any case rejected conclusively the central management and control test as an appropriate legal test for the residence of a trust in a situation where it was found, for example, that someone other than the trustee exercised management and control of the trust property, or that the trustee resided in one place but exercised the management and control of the trust property in another place.”

2. Robert Couzin, Corporate Residence and International Taxation, (Amsterdam: International Bureau of Fiscal Documentation, 2002), page 43.

3. American Thread Company v.Joyce (Surveyor of Taxes), (1911-13) 6 TC 1 (KB Div, CA) at p. 164.

4. See, for example, section 102 of the Canada Business Corporations Act and section 115 of the Business Corporations Act (Ontario) which specify that, subject to
a unanimous shareholders’ agreement, the directors of a corporation shall manage or supervise the management of the corporation’s business.