Dual Resident Individuals

Article IV(2)

Article IV(2) provides rules for the determination of a single residence for Treaty purposes for individuals otherwise resident in both Canada and the U.S. under the rules in Article IV(1).

Article IV(2) provides a series of sequential tests (commonly referred to as “treaty tie-breaker” tests). The purpose of these tests is to determine to which State a particular individual has more meaningful or significant connections as opposed to residency based merely on the length of time an individual spends in a particular jurisdiction as provided for under the traditional residency tests found in the Act and the Code.

If a particular test as applied by the taxpayer provides a resolution and assigns an individual’s residency to either the U.S. or Canada, no further inquiry is required.

Individual’s residency under Article IV is accepted for all purposes of the Act by deeming a particular individual to be resident in that state as determined under the Treaty.

Permanent Home:

A “dual resident” individual is initially deemed to be a resident of the State in which such individual has a “permanent home” available to her.

The CRA has taken the position that any kind of dwelling place that the individual retains for her permanent (as opposed to occasional) use, whether that dwelling place is  rented or purchased or otherwise occupied on a permanent basis could be considered a “permanent home”.

According to CRA, a permanent home may be any kind of dwelling place that the individual retains for his or her permanent use, whether that dwelling place is rented or purchased or otherwise occupied on a permanent basis. It is the permanence of the home, rather than its size or the nature of ownership or tenancy, that is of relevance.

The permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it is necessary of short duration.

If the taxpayer rents her home to an unrelated person prior to her absence from Canada, the home is not considered to be available to the taxpayer and such individual would be considered to be a U.S. resident if she acquired a permanent home in the U.S.

A leased home would not be considered to be permanent home in Canada only if it has been leased to an arm’s length person on arm’s length terms. As such, as a practical matter, a short-term lease or rental arrangements whereby an individual may terminate the lease are likely to result in the determination that the particular premises or residential dwellings are “available” for the person’s use and therefore constitute a permanent home for the purposes of Article IV(2).

Centre of Vital Interests Test:

With regard to the center of vital interest test, beyond its general purpose of weighing personal and economic relations of a particular individual with Canada and the U.S., the CRA would consider multiple factors that are used in determining an individual’s factual residence in Canada.

Such factors include economic ties with Canada (such as employment with a Canadian employer, active involvement in a Canadian business, Canadian bank and securities accounts, Canadian retirement savings plans, personal and other property in Canada) and social ties with Canada (such as memberships in Canadian professional, social, recreational or religious organizations, presence of family member in Canada.

Habitual Abode:

In determining the place of habitual abode the number of days spent by an individual in a particular jurisdiction appears to be the most significant factor.

In addition to this purely mathematical analysis, the nature of the taxpayer’s lifestyle and activities in each country should also be considered.

Citizenship Test:

If an individual has a habitual abode in both States or in neither State, she is deemed to be a resident in the State of which she is a citizen.

In the case where a person is a citizen of both countries, or of neither, and on the basis that none of the previous test provided a determination of residency in one State or the other, an individual may refer her case to the relevant competent authority for a determination of residence by mutual agreement.

References:

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

By:  Vitaly Timokhov, Raymond Montero, David Kerzner

Published by: Thomson Carswell