Residency

Canada U.S. Tax Treaty Article 4

Residence

1. For the purposes of this Convention, the term “resident of a Contracting State” means any person

Who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of

Management, place of incorporation or any other criterion of a similar nature, but in the case of an estate

Or trust, only to the extent that income derived by such estate or trust is liable to tax in that State, either

in its hands or in the hands of its beneficiaries.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting

States, then his status shall be determined as follows:

(a) He shall be deemed to be a resident of the Contracting State in which he has a

Permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (center of vital interests);

(b) If the Contracting State in which he has his center of vital interests cannot be

Determined, he shall be deemed to be a resident of the Contracting State in which he has a habitual abode;

(c) If he has a habitual abode in both States or in neither State, he shall be deemed to

be a resident of the Contracting State of which he is a citizen; and

(d) If he is a citizen of both States or of neither of them, the competent authorities of the

Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting

States, then if it was created under the laws in force in a Contracting State, it shall be deemed to be a resident of that State.

4. Where by reason of the provisions of paragraph 1 an estate, trust or other person (other than an individual or a company) is a resident of both Contracting States, the competent authorities of the States shall by mutual agreement endeavor to settle the question and to determine the mode of application of the Convention to such person.
5. Notwithstanding the provisions of the preceding paragraphs, an individual shall be deemed to be a resident of a Contracting State if:

(a) The individual is an employee of that State or of a political subdivision, local authority or instrumentality thereof rendering services in the discharge of functions of a governmental nature in the other Contracting State or in a third State; and

(b) The individual is subjected in the first-mentioned State to similar obligations in respect of taxes on income as are residents of the first-mentioned State.

The spouse and dependent children residing with such an individual and meeting the requirements of subparagraph (b) above shall also be deemed to be residents of the first-mentioned State.

Introduction:

The primary objective of the tax treaties is to eliminate double taxation. To achieve this goal, treaties aim to define the term “resident” so that an individual or corporation generally will not be subject to tax as a resident of each contracting state.

In order to receive treaty benefits it is also important to determine a country of residence. Generally speaking, only residents of Canada and the United States may claim the benefits of the Treaty.

Article IV is based on the principal of fiscal domicile of the OECD Model Treaty whereby a person is considered to be a resident of a country, If, under the laws of that country, the person is subject to taxation by that country because it is the person’s country of domicile, residence, citizenship, place of management, place of incorporation or similar criterion.

For purposes of the Treaty, a person is a resident of the State in which he/she is resident under internal tax law.

Citizenship alone does not establish residence under article IV.

If a person is defined as resident of both Canada and the United States (an individual who is taxable as a resident under domestic tax law in both Canada and the U.S.), there are tie breaker rules available to determine residence.

Relief under tax treaty for tax liability does not mean a relief from domestic compliance and reporting obligations.

A corporation may be considered as a dual resident if it is incorporated in the U.S. but is managed and controlled in Canada.

U.S. taxes its citizens and residents on their worldwide income.

Explanation and Interpretation of Article IV under Canadian Law:

Canada imposes primary tax liability based on tax residency.

Every person resident in Canada is required to pay income tax on taxable income from all domestic and foreign sources.

A non-resident person is liable for in tax in Canada on the income earned from Canadian sources i.e employment in Canada, Business carried on in Canada and Gains from the disposition of taxable Canadian property.

A non-resident may also be liable for an income tax imposed by way of withholding tax on the gross amount of income like interest, royalties, and management fee.

Non-resident corporations carrying business in Canada through branch may also be liable for branch profits tax designed to replicate withholding tax on the repatriation of profits from Canada by way of dividends.

Different rules apply in determination of residency of individuals, corporations, trusts and partnerships.

In common law, residency is based on the economic and non-economic relationships existing between the taxpayer and Canada.

If dual residency arises from the application of domestic laws in two or more countries, it may be resolved by deeming a taxpayer not to be resident in Canada for the purposes of the Act if the taxpayer is found to be resident in another country under a relevant treaty.

If treaty relief is not available, a dual resident will be subject to tax in Canada and another country, with the only relief available in the form of foreign tax credits and deductions provided unilaterally by Canada under the Act.

Factual Residence:

Generally, an individual would be considered to be a “factual” resident of Canada if that individual maintains significant residential ties with Canada.

Presence of dwelling place, a spouse or dependents in Canada would indicate that an individual maintains significant ties with Canada to be considered as resident of Canada.

Following are some secondary residential ties summarized by CRA in its administrative policy:

1 – Personal property in Canada such as furniture, clothing, automobiles and recreational vehicles.

2 – Social ties with Canada such as memberships in Canadian recreational and religious organizations.

3 – Economic ties with Canada such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts.

4 – Landed immigrant status or appropriate work permits in Canada.

5 – Hospitalization and medical insurance coverage from a province or territory of Canada.

6 – A driver’s license from a province or territory of Canada.

7 – A vehicle registered in a province or territory of Canada.

8 – A seasonal dwelling place in Canada or a leased dwelling place.

9 – A Canadian passport.

10 – Memberships in Canadian unions or professional organizations.

Determination of individual’s residency under the Deeming Rules:

An individual may acquire residency in Canada even if she has a permanent home in another country and comes to Canada on a vacation or business trip lasting more than 182 days in a given calendar year.

Merely driving across the border for daily commute does not constitute sojourning and a particular individual who commutes to work in Canada on a daily basis may not acquire residency in Canada even if she spends more than 183 days in Canada.

An individual does not have to be physically present in Canada in order to be ordinarily resident in Canada.

An individual (and her children and other dependent persons) may be deemed to be resident in Canada if she resides overseas and is employed by the Canadian or provincial governments, provided, however, that she and her dependents were resident in Canada prior to the commencement of such employment.

An individual would be deemed to be resident in Canada if she, at any time during the year, was a member of the Canadian Forces or the overseas Canadian Forces school staff, an ambassador, minister, high commissioner, officer or servant of Canada or of a Canadian province, or performed services in a foreign country under certain Canadian international development programs.

A person would be deemed to be resident in Canada if she is entitled, under an applicable treaty, to an exemption from income tax payable in any country by reason of being a family member of an individual resident in Canada.

An individual who may be resident in Canada for only part of the year will be subject to tax on her worldwide income during the part of the year in which she was resident in Canada. During the other part of the year, she should be subject to Canadian taxation as a non-resident if she has income from Canadian sources.

An individual may choose to obtain a formal determination of her residency status from the International Tax Services Office of the CRA by completing From NR73.

Residence of Corporations:

All corporations incorporated in Canada under federal or provincial law after April 26, 1965, are deemed to be resident in Canada for tax purposes.

The residency of corporations can also be determined by management and control rules. These rules mostly apply to corporations established under foreign law. First step in determining residency is to check if particular entity qualifies as corporation for purpose of the Act.

If a foreign entity is a corporation for Canadian tax purposes, it should generally be resident in the country where its central management and control is exercised.

If management and control is exercised in more than one country or it can be exercised outside of the state in which a particular company has been incorporated, the company may be resident in more than one state and become a dual-resident company, potentially subject to tax on its worldwide income in two states.

In Canada, corporate dual residency is usually resolved by the application of the tie-breaker rules available in the treaty.

A dual-resident company will be deemed to be not resident in Canada if it is found to be resident in a country other than Canada under a relevant tax treaty.

If a Canadian corporation was formed as a result of a merger or amalgamation and one of the predecessor corporations was not resident in Canada, such predecessor is deemed to have become resident in Canada immediately before the particular merger or amalgamation.

Residence of Partnerships:

A partnership is deemed to be a separate person resident in Canada for limited purposes of computing its income and allocating such income to its partners.

If a partnership makes or receives payments of interest or other income subject to withholding tax provisions, it may be deemed to be a person resident in Canada.

Residence of Trusts and Estates:

The Supreme Court of Canada held that the residence of a trust should be determined by the principle that a trust resides, for the purposes of the Act, where “it’s real business is carried on”, which is the place where the central management and control of the trust actually takes place.

If a Canadian resident contributes property to a non-resident trust with Canadian or certain non-resident beneficiaries, then the trust may be deemed to be resident in for withholding tax purposes if the trust makes certain Canadian-sourced payments to another non-resident person.

References:

Advisor’s Guide to Canada – U.S. Tax Treaty

By:  Vitaly Timokhov, Raymond Montero, David Kerzner

Published by: Thomson Carswell