To resolve US tariff problems, some Canadian corporations are
shifting their production to the United States to serve the US
market. As a consequence of the shift in production, these
corporations are also considering shifting their residence
(emigrating), especially where most of their market is in the
United States and the shareholders are non-residents of Canada.
However, "wait and see" is still the dominant approach.
This article describes the planning and mechanics for emigrating,
whether in response to tariffs or for other reasons.
If a corporation is incorporated outside Canada, it can emigrate
just by shifting its central management and control to the
preferred jurisdiction. However, if it is 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)). The continued corporation will be deemed to
have been incorporated in that other jurisdiction from the time of
continuation. Tiebreaker rules under any applicable tax treaty also
must be considered.
On emigration, subsection 128.1(4) will result in a deemed
disposition and reacquisition of each corporate property at FMV. In
addition, section 219.1 imposes a tax on the emigrating corporation
of 25 percent of the excess of the total FMV of the
corporation's property over the total of the PUC of its shares
and outstanding debt. The 25 percent rate may be reduced to the
rate for dividends under a tax treaty between Canada and the
destination jurisdiction, unless one of the main purposes of the
emigration is to reduce tax under part I or part XIII (section
219.3).
Emigration does not affect shareholders the same way: a
Canadian-resident shareholder does not have a deemed disposition on
emigration (CRA document no. 2005-0147131R3, 2005) and there is no
effect on ACB (see, for example, TPCO Holding Corp.).
Planning
1. The Merger and Acquisition Context
In a non-arm's-length M & A context, one strategy
involves reducing the tax arising on the subsection 128.1(4) deemed
disposition through a paragraph 88(1)(d) bump in tax cost. Suppose
(1) a non-resident parent forms a Canadian acquisition corporation
(Acquireco), (2) Acquireco purchases all the shares of the Canadian
target corporation (Target), (3) Target and Acquireco amalgamate
and the tax cost of property held by Target is increased up to the
maximum under paragraph 88(1)(d) (usually FMV), and (4) the
resulting corporation continues into another jurisdiction (as
described in CRA document no. 2016-0643931R3, 2017).
Note that the sale in step 2 causes the vendors to be taxable on
their disposition of the shares of Target. Also, for the planning
to be effective, the accrued capital gains within Target must be
associated with non-depreciable property, such as land or shares,
and the bump denial rules must not be engaged.
2. Somersault Planning
An emigrating corporation with significant accrued gains on its
property may also be able to indirectly emigrate without incurring
emigration tax by using a somersault transaction.
Suppose (1) the corporation seeking to emigrate (Canco) forms a new
non-resident corporation (NR Topco), (2) NR Topco acquires the
shares of Canco from the Canco shareholders in consideration for
shares of NR Topco, and (3) Canco redeems its shares of NR Topco
for a nominal amount.
A disadvantage of this planning is that the share exchange in step
2 is a taxable transaction for Canadian-resident shareholders of
Canco. However, non-resident shareholders of Canco should not be
subject to Canadian tax on the share exchange unless the shares of
Canco are taxable Canadian property (see, for example, Maxar Technologies Inc.).
The success of this planning depends on the tax attributes of the
corporation and the potential application of the foreign affiliate
dumping rules.
Unlike in 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.
3. Other Approaches
Depending on the particular facts, other techniques for managing the tax consequences of emigration may also be available. One possibility is a pre-continuance reorganization to utilize capital dividend account balances, safe income, and non-capital losses.
Originally published by Canadian Tax Foundation Volume 15, Number 3, August 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
