Corporations resident in Canada may consider moving their place of residence to another jurisdiction for a variety of reasons – whether to access new markets, tax rate arbitrage or to mitigate the impact of tariffs. Under Income Tax Act (Canada) (the “Act”), however, corporate emigration can trigger significant tax consequences, including a deemed disposition of assets and potential exit charges.

With tariff uncertainty and renewed pressure on cross-border competitiveness, this article highlights the key rules, risks, and planning opportunities that Canadian companies should understand before making such a move.  

Corporate emigration from Canada: Different scenarios, different rules

The tax and legal consequences of corporate emigration are not uniform. They depend on the corporation’s status, structure, and objectives. In practice, different situations call for different approaches. Below we outline the main scenarios and the actions they typically require.

1. Corporations incorporated outside of Canada

For a corporation incorporated outside of Canada but resident in Canada under common law by virtue of having its central management and control in Canada, shifting central management and control to another jurisdiction will suffice to effect emigration. However, if  the corporation was incorporated in Canada after April 26, 1965, emigration also requires continuing the corporation under the corporate law of the new jurisdiction (subsection 250(5.1) of the Act). The continued corporation will be deemed to have been incorporated in that other jurisdiction from the time of continuation. Tie-breaker rules under any applicable tax treaty also must be considered.

2. Corporations that cease to be resident in Canada

Where a corporation ceases to be resident in Canada, subsection 128.1(4) of the Act will result in a deemed disposition and reacquisition of property at fair market value. The deemed disposition will cause the corporation to realize any inherent capital gains or losses. In addition, section 219.1 of the Act imposes a tax on the corporation itself in an amount that is equal to 25% of the excess of the total fair market value of the corporation’s property over the total of the paid-up capital of its shares and all outstanding debt. The 25% rate may be reduced to the rate for dividends under the tax treaty between Canada and the destination jurisdiction. However, the reduced rate will not apply if one of the main purposes of the emigration was to reduce tax under Part I or under Part XIII (section 219.1) of the Act. 

3. Consequences for shareholders

If a corporation emigrates, its shareholders would generally not be considered to have disposed of their shares in the emigrating corporation. Consequently, the shareholders should not realize a gain or loss (see for example, CRAViews, Ruling, 2005-0147131R3 — Continuance—Subdivision i). Furthermore, the continuance should have no effect on the adjusted cost base (“ACB”) of a Canadian resident shareholder’s shares in the emigrating corporation (see for example the emigration of TPCO Holdings Corp.)

4. M&A transactions: Using the Section 88(1)(d) bump

In the context of a merger and acquisition transaction, it may be possible to reduce capital gains realized on continuance with a bump in tax cost under paragraph 88(1)(d) of the Act. For this type of planning to be effective, the accrued capital gains must be associated with non-depreciable property such as land or shares and the bump denial rules must not be engaged. 

In these situations:

  • a non-resident parent forms a Canadian acquisition corporation (“Acquireco”);
  • Acquireco purchases all the shares of the Canadian target corporation (“Target”);
  • Target and Acquireco amalgamate and the tax cost of property held by Target is increased up to the maximum under paragraph 88(1)(d) of the Act (usually FMV); and
  • the resulting corporation continues into another jurisdiction (as in CRA document no. 2016-0643931R3, 2017).

The bump should reduce the tax arising on the subsection 128.1(4) deemed disposition by the emigrating corporation.  The vendors are taxable on their disposition of the shares of Target to Acquireco.

5. Alternative structures: The somersault plan

A different planning technique involves a somersault.

For example:

  • the corporation seeking to emigrate (“Canco”) forms a new non-resident corporation (“NR Topco”);
  • NR Topco acquires the shares of Canco from the Canco shareholders in consideration for shares of NR Topco; and
  • Canco redeems its shares of NR Topco for a nominal amount.

While this plan should not result in any emigration tax for either Canco or NR Topco, the share exchange should be a taxable transaction for Canadian resident shareholders of Canada. However, unless the shares of Canco are taxable Canadian property, non-resident shareholders of Canco should not be subject to Canadian tax upon the share exchange (see for example Maxar Technologies Ltd ).

The success of this planning would depend on the tax attributes of the corporation and would be subject to the potential application of the foreign affiliate dumping rules. Unlike a continuance, Canco will continue to be subject to Canadian tax on a go-forward basis on its income since it will continue to be a Canadian resident.

Other techniques for managing the tax consequences of emigration may also be available, such as pre-continuance reorganizations to utilize capital dividend account balances, safe income, non-capital losses or debt, in all cases depending on the particular facts.

Because corporate emigration can trigger substantial exit taxes and requires careful navigation of Canadian and international rules, advance planning is essential. If your business is considering a move abroad, or if emigration could become part of a future transaction, contact a member of Miller Thomson’s Corporate Tax group to develop a tailored strategy.