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The primary basis for taxation in Canada isresidence of the taxpayer; Canada does notimpose tax on the basis of citizenship. Anyresident of Canada, whether individual orcorporate, pays tax on its worldwideincome. The federal Income Tax Act (“ITA”)does not define the term resident.Generally, residency is determined usingcommon law principles, taking intoconsideration factors such as the dwellingplace of individuals and the location of acorporation’s central management andcontrol. Certain deeming provisions in theITA may also apply.Non-residents pay tax on their Canadiansource income, which will typically includeincome from employment or businesscarried on in Canada and the disposition oftaxable Canadian property. Taxes on nonresidentsare subject to relief by way of ratereduction or, to a limited extent, eliminationof Canadian tax, under a tax treaty. Canadahas an extensive network of treaties, withapproximately 90 treaties currently in force.CORPORATE TAXATIONThe entity chosen by a taxpayer to conductits business activities will determine how thebusiness will be taxed. For instance, a soleproprietor adds the business income earnedfrom the business to his or her personalincome. A partnership must compute itsincome as though it were a separatetaxpayer and then a partner’s share of thepartnership income is taxed at the samerates applicable to other income earned bysuch partner. Hence, partnerships aregenerally flow-throughs for tax purposes.Special rules apply to limited partners thatmay, in certain circumstances, restrict theirability to claim losses of a limitedpartnership allocated to them.Unlike partnerships, trusts resident inCanada are taxable entities under the ITA.However, certain trusts, including personaltrusts and mutual fund trusts, may beeligible for an offsetting deduction in respectof amounts distributed to beneficiaries. Theeffect of such rules is to reduce (oreliminate) tax at the trust level. Suchdistributions are generally taxable in thehands of the beneficiaries.An incorporated company is also taxed as aseparate legal entity. Any corporationresident in Canada is liable for Canadianincome tax on its worldwide income (subjectto relief from applicable tax treaties to whichCanada is a party). A corporation canestablish Canadian residency byincorporating in Canada (or a province orterritory within Canada) or by having itsdirecting mind reside in Canada. Theapplicable federal corporate tax rate willvary, according to the nature of acorporation’s business, its residency statusand its affiliations.Foreign Investment in CanadaForeign corporations planning to invest inCanada may establish their Canadianoperations either through a branch or aCanadian subsidiary company. The taxtreatment of a branch versus a subsidiaryvaries significantly, so foreign investorsshould carefully consider which option willminimize their tax burdens before investingin Canada.Taxation Law 56