This case deals with tax on a capital gain of a Dutch corporation operated under the control of two Dutch émigrés living in Canada. The corporation bought a partnership interest in a Canadian farm owned 51% by its Dutch shareholders (husband and wife). The shareholders had immigrated to Canada in May 1998, after which they bought the farm property and began to run the farm.
The corporate director was in the Netherlands; she was sister of the wife. The evidence showed that she did whatever she was told by her sister and brother-in-law and exercised no independent judgment.
The Court concluded that the corporation was resident in Canada under the common law test, which determines residency based on where the central mind and management of the corporation is.
The appellant argued a nice point that on becoming resident in Canada, the corporation would have had a deemed disposition of its ownership of the Canadian farm partnership interest. Justice Smith did not really explore that point and did not need to because he concluded that the corporation became resident in Canada in 1998 when the couple arrived, which was around the time it bought the Canadian partnership interest. So had there been any deemed disposition, it would have occurred at the time of acquisition and would not have affected in a meaningful way the determination of capital gain.
This decision raises an interesting question about whether the deemed disposition in ITA s. 128.1(1)(b) might apply when a corporation changes its resident status solely based on central management and control, i.e., without any formal continuation. (Had the property been “taxable Canadian property”, the deemed disposition would not have applied: 128.1(b)(i). Although the Crown initially argued that the property was “taxable Canadian property”, it abandoned that view.)
Justice Smith did not need to answer the question about whether the deemed disposition could apply to a case where a corporation does not continue in Canada but simply moves its mind and management. But he seems to reject the possibility that immigration can be based on a change in residence without continuation:
“[55] I do not propose to elaborate on this issue other than to indicate that the subject capital gain was realized in 2009 (the taxation year under appeal) and I have already concluded that under Canadian law and for tax purposes, the Appellant was a resident of Canada during that taxation year. I agree with the Respondent, that this conclusion does not trigger a deemed disposition or an analysis of subsection 128.1(1), since there is no evidence that the Appellant actually ceased to be a resident of the Netherlands or was continued under Canadian law. As indicated by the Appellant itself, its corporate existence was intentionally maintained in the Netherlands.”
However, s. 128.1(1) does not turn on whether a corporation ceased to be a resident of another nation. It is triggered “where at a particular time a taxpayer becomes resident in Canada”. The ITA is a Canadian statute and has to be interpreted under Canadian law. If the corporation becomes resident in Canada for Canadian tax purposes, then s. 128.1(1) seems to apply.
This is just an interesting point to observe. It might be helpful to taxpayers in the future. Obviously the appellant thought it might be helpful here.
Landbouwbedrijf Backx B.V. v. The Queen, 2018 TCC 142 (Smith)