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Canada: Treaties: Residence tiebreaker

26 November 2014   (0 Comments)
Posted by: Author: Jack Bernstein
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Author: Jack Bernstein (Aird & Berlis LLP, Toronto)

In Black (2014 TCC 12) and Elliott, sub nom. Dysert (2013 TCC 57), the TCC recently reviewed the residence tiebreaker clause under the Canada-US treaty and the ability of one state to continue to tax an individual who is resident in the other state under the tiebreaker. This article reviews the cases in the context of the Canadian courts’ interpretation of the tiebreaker clause.

A residence tiebreaker clause under a Canadian treaty shields from double taxation an individual who is factually a dual resident under the relevant treaty and domestic law. A treaty resident is liable to tax generally and not merely on income that was remitted to that state. For example, a UK-resident but non-domiciled individual is taxable only on income earned in or remitted to the United Kingdom and is thus not a resident for the purposes of the treaty. If an individual is found to be resident only in one state under the tiebreaker clause, the determination is relevant for income distributions (such as interest, dividends, and royalties) that are eligible for treaty-reduced withholding tax rates. Arguably, other income is still taxable by the other state, particularly if the treaty does not contain an article that deals with other income.

Four tests can be used to resolve the question of dual residence under a tiebreaker clause (permanent residence, centre of vital interests, habitual abode, and citizenship); for a dual citizen, the matter is mutually settled by the competent authorities. Each test is dealt with sequentially: residence is determined by the first test that the individual does not satisfy in both states.

The first test looks to the location, if any, of a permanent residence that is available to the individual at all times. The residence need not be owned by the individual; it can be a rented accommodation, or it can be a room available at a family member’s or friend’s home. Although the residence must be available, the individual need never occupy it. The size of the permanent residence is not relevant: an individual may own a mansion in one country and have available to him or her a room in a child’s home in the other country. If the individual has a residence available in only one state, he or she is resident in that state, but if he or she has residences available at all times in both states, then the next test is activated.

The second test looks to the location of the individual’s centre of vital interests—the state where the individual has more personal and economic connections (Hertel, 93 DTC 721 (TCC)). The OECD commentary refers to family and social relationships; occupations; political, cultural and other activities; the place of business; and the place where property is administered. The courts have referred to the place where family and friends reside; the place where investments are located; the place of employment or the place where business income is earned; the place where the individual has club and professional memberships, a driver’s licence, car registrations, health insurance, credit cards, retirement plans, bank accounts, and cellphones; any declaration of residence (such as the use of a Canadian address); and the place where the individual votes. The personal and economic ties in each country are compared; if an individual has a closer connection to one state under this test, then he or she is resident in that state.

In Elliott, three US individuals were independent consultants under a three-year contract with Syncrude Canada Ltd. They rented accommodation in Canada and owned homes in the United States. They owned cars in the United States and leased cars in Canada; they had chequing accounts in Canada and in the United States. Their families resided in the United States, and their show dogs and horses were housed there. The three individuals held memberships in US organizations; used US cellphones; had only US drivers’ licences; owned US liability insurance and US retirement funds; maintained US health and life insurance, and obtained the Alberta health insurance coverage offered to transient workers; and returned to the United States for holidays. The court concluded that the individuals had the minimum ties to Canada for persons working in Canada, but their centres of vital interests were in the United States. The individuals were present in Canada more than 183 days in each year and were thus resident under the Canadian domestic rule by day count, but they were also resident in the United States. Under the tiebreaker rule, they were resident only in the United States, and subsection 250(5) deemed them to be only US residents because they were US residents under a tax treaty.

If an individual does not have an overriding centre of vital interests in one state, resort is made to the third test, which looks to where the person has his or her habitual abode. "Habitual abode” is not defined in the Act. The Canadian Oxford Dictionary defines "habitual” as "regular, continual, usual”; and Black’s Law Dictionary (6th ed.) defines the term as "[c]ustomary, usual, of the nature of a habit.” The OECD commentary refers to the number of days over a period of time, but the number of days is not the sole factor: the test is more closely aligned with closer personal and economic relations. The OECD commentary on article 4 says that "habitual abode” reflects an attachment such that "it is felt to be natural that the right to tax devolves upon [the] particular State.”

In Lingle (2010 FCA 152), the frequency of stays was relevant; in Podd (76 TCM 906 (1998)), Allchin (2005 TCC 711), and Trieste (2012 FCA 320), the taxpayers all spent more than half a year in one state. In Trieste, the taxpayer spent much more time in Canada than in the United States: as in Lingle, the court concluded that in the settled routine of his life he regularly, normally, and customarily lived in Canada. Although the "habitual abode” test does not specify the length of time over which the comparison is to be made, the period must be sufficient for one to determine whether residence in a state is habitual and to determine the intervals at which the stays occur. A habitual stay may be reflected in routine visits once a week, once a month, or once a year, but for the state to be the habitual abode the individual must have a closer connection to that state.

If habitual abode cannot be determined, reference is made to the fourth test in the Canada-US treaty: citizenship. If a person is a dual citizen, the competent authorities resolve dual residence in favour of one state.

In Black, the taxpayer was a UK resident under the tiebreaker clause. He was a UK non-domiciled resident who was thus taxable in the United Kingdom only on income earned in or remitted to the United Kingdom. The court concluded that he was a UK resident even though he was not liable to UK tax on all of his income; the treaty application and reduced withholding tax were restricted to Canadian-source income remitted and hence taxable in the United Kingdom.

For 2002, the minister assessed the taxpayer as a Canadian resident for the purposes of the Act and included income that had been derived from office and employment duties performed outside Canada but had not been remitted to the United Kingdom and thus was not covered by the treaty. The parties agreed that the taxpayer was a UK resident "for the purpose of the Convention.” The court concluded that there is no inconsistency between being a Canadian resident under the Act and a UK resident for treaty purposes. If an income or capital item is not provided for in the treaty, Canada has authority to tax that item unrestricted by the treaty. The taxpayer remained resident in Canada in 2002 under the Act, even though he was a deemed UK resident for treaty purposes. As a resident of Canada, he was subject to tax on his worldwide income, including income from employment in a third state (in this case, the United States) unless the treaty said otherwise, which it did not.

This article first appeared on ctf.ca.


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