COVID-19 travel restrictions raise tax questions

  • June 30, 2020

Travel restrictions surrounding COVID-19 have created uncertainty for foreign entities doing business in Canada – over tax issues such as residency, the determination of foreign accrual property income, and whether a company will be considered to be carrying on work in Canada just because its employees are there are just some examples.

The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada has some suggestions on how the Canada Revenue Agency’s Guidance on International Income Tax Issues raised by the COVID-19 crisis could provide clarity on those issues.

The focus of the guidance, for example, is the effect of the travel restrictions on whether a foreign corporation will be resident in Canada. The Joint Committee notes that corporations formed under foreign law will be considered resident in Canada if their “central management and control” is located here, especially if their board of directors meets here. The Guidance says that in cases where directors must participate in a board meeting from Canada due to travel restrictions, there will be no change in residency considerations. For corporations in countries with which Canada has no tax treaties, the determination will be made on a case-by-case basis.

The Joint Committee recommends that the same approach be taken whenever the common law corporate residency concept is relevant for Canadian income tax purpose, including the determination of whether a foreign affiliate is a resident in a “designated treaty country” – a concept that is relevant for determining the foreign affiliate’s surplus pools.

“Canadian multinationals would benefit from further guidance on this issue,” the Joint Committee writes. “For example, where one or more directors cannot attend a board meeting in person solely because of travel restrictions, it would be helpful for the Agency to confirm that this will not, in and of itself, negatively impact the treatment of active income earned in foreign jurisdictions as exempt surplus.”

The Joint Committee also points out that when employees are stranded in non-designated treaty countries there could be an impact on the determination of whether income from an active business carried on by a foreign affiliate that is resident in a designated treaty country is included in its exempt earnings or taxable earnings.

The Guidance says that the Agency won’t consider a non-resident entity to be resident just because its employees are stranded in Canada as a result of travel restriction, assuming the entity is resident in a treaty country.

“There are other provisions of certain tax treaties, such as the 12-month period referenced in the building site and installation or drilling rig provisions, that could result in similar permanent establishment issues, if the project is delayed due to the travel restrictions. As such, would the Agency be willing to provide similar administrative relief in these situations?”

U.S. residents who normally pay income tax in their home country will not have to count the days worked in Canada solely due to travel restrictions against the 183-day test in the Canada-U.S. income tax treaty. The Joint Committee points out that there are other situations where an individual’s status can depend on the number of days spent in Canada, and asks whether the CRA will similarly not count days in Canada in those instances.

It also says that it would be helpful if the CRA would comment on similar concerns for GST/HST issues, addressing “whether the determination as to whether a non-resident person has a significant presence in Canada should be made without considering the activities that the non-resident is required to perform in Canada as a result of the travel restrictions.”