Category Archives: Tax treaties

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 3

In the last article in this Blog, I provided an overview of how Canada’s tax treaties can help a Canadian seeking to become a non-resident, particularly in the wake of the July 18, 2017 release from the Ministry of Finance.

Canada currently has tax treaties in force with 93 countries in various parts of the world.

The purpose of this article is for me to explain what I call my “Guaranteed No-Fail Recipe for Becoming a Non-Resident”.

The beauty of this recipe is that it has only three (3) ingredients, and by properly using them, all of the uncertainty that might otherwise exist regarding Canadian residency status will be removed.

The following are the required three ingredients:

  • The individual becomes resident of a country (“destination country”) which has a typical tie-breaker rule in its treaty with Canada,
  • The individual has no “permanent home available”(“PHA”) in Canada, and
  • The individual has a PHA available in the destination country.

I will deal with each of these three in more detail:

The individual becomes resident of a destination country which has a typical tie-breaker rule in its treaty with Canada.

The “typical” tie breaker rule would be like the one found in Article IV(2) of our tax treaty with the U.S., and which I quoted in the last article. For convenience,  I will quote it again here:

“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 (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an 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.”

Virtually all of Canada’s treaties have this typical article, but there are exceptions. One notable exception is our treaty with Japan. It has no such rule, and just leaves it up to the tax authorities of the two countries to duke it out.

It is critical for the expat to become a resident of that country for the purposes of that treaty, and careful attention must be paid to the definition of “resident” found in that treaty. For example, many Canadians have moved to Dubai, which is part of the United Arab Emirates (“UAE”). Curiously, Canada has a tax treaty with UAE-that is strange, given that the UAE does not levy income tax.

However, for an individual to be a UAE resident for the purposes of the treaty, he or she must be a UAE “national”, which means a citizen. That will not be the case for a Canadian expat, unless maybe he or she marries into one of the royal families.

The individual has no “permanent home available”(“PHA”) in Canada

The CRA states in paragraph 1.46 of Folio S5-F1-C1 that “A permanent home (as that term is used in income tax treaties) may be any kind of dwelling place that the individual retains for his or her permanent (as opposed to occasional) use, whether that dwelling place is rented (including a rented furnished room) 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”.

Presumably, if a Canadian expat retains ownership of his former Canadian residence after leaving, but rents it to arm’s length parties under terms that would not allow him or her to regain occupancy on short notice, that property would not be considered a PHA in Canada.

It is important to note that the test is whether or not the expat has a PHA-it just has to be available-not owned. So, if an expat just transfers his Canadian residence to his kids or a family trust, that may not work if it could be shown that it is actually available to him or her for use during Canadian visits.

 

If these three ingredients are present, the expat would automatically be deemed a nonresident, and there would be need to look further into the other parts of the “tie-breaker” rule, including the often nebulous “centre of vital interests” test.

 

Be wary one point, however. This recipe may not work if the expat is just a “resident of convenience” of the destination country. That is, if he or she is just a resident under their tax laws without any real connection or without living there for a significant period of time each year.

For example, it is possible to create a form of tax residence in Malta without actually living there at all and have the three ingredients present. Very little tax would have to be paid to the Maltese government.

However, if the CRA becomes aware of that fact, they would likely challenge the use of the Malta treaty.

For example, the CRA states in Income Tax Technical News No. 35, dated February 26, 2007:

“The CRA will generally accept that a person is resident in a contracting state where the person’s income is subject to tax in a contracting state but under the state’s domestic law the income is not taxed or is taxed at a low rate.

This position would not apply where the arrangement is abusive such as where the person is a resident for convenience and does not have any material economic nexus to the state.”

In the next article in this series, I will discuss the dreaded “departure tax”.

A TAX GUIDE FOR AFFLUENT CANADIANS HEADING FOR THE EXIT-PART 2

In the last article in this Blog, I predicted that, “After the July 18, 2017 release from the Ministry of Finance, many affluent and successful Canadians will start to seriously consider finding a more hospitable place to reside.” Feedback from my contacts suggest that my prediction was quite accurate. The purpose of this article is… Continue Reading

NEW TAX TREATY BETWEEN CANADA AND ISRAEL CLOSES LITTLE-KNOWN LOOPHOLE

On September 23, 2016, I got an email from the Ministry of Finance announcing a new tax treaty between Canada and Israel. The actual posting on the Ministry’s website contained the following statement: “A new Convention between the Government of Canada and the Government of the State of Israel for the Avoidance of Double Taxation… Continue Reading

CANADIAN NON-RESIDENT WITHHOLDING TAX ISSUES IN CONNECTION WITH PAYMENTS TO PARTNERSHIPS

Tax under Part XIII of the Income Tax Act (“the Act”) applies to many types of payments received by non-residents of Canada from Canadian residents[1]. Most commonly this can apply to dividends paid by Canadian corporations; royalties paid by Canadians for the use of property in Canada; rents paid by Canadians for the use of… Continue Reading

MORE HOGWASH ON OFFSHORE TAX AVOIDANCE FROM TORONTO STAR/CBC DUO-CANADA’S TIEAs GET A BUM RAP!

Most readers of the June 17, 2016 edition of the Toronto Star could not have failed to notice the headline of a prominently featured article: “Tax loopholes cost Canada billions in lost revenue” This was followed by the following subheading: “Canada used agreements meant to crack-down on tax evasion to open-up tax loopholes” What a… Continue Reading

CANADIAN TAX ISSUES WITH CROSS-BORDER GUARANTEE FEES

In situations where a foreign parent company (“Forco”) guarantees a debt of a Canadian subsidiary company (“Canco”) a fee may be charged for the provision of that guarantee. This would be particularly sensible for a tax planning perspective if Forco is subject to a lower rate of tax on its income than Canco. In addition,… Continue Reading

WHAT IS A “PERIODIC PENSION PAYMENT” FOR CANADIAN TAX TREATY PURPOSES?

As a general rule, when a nonresident of Canada receives a payment from a Canadian-based pension plan, including a registered pension plan (i.e. a normal company pension plan), a registered retirement savings plan (”RRSP”), or a Registered Retirement Income Fund (“RRIF”), Canada imposes a 25% tax under Part XIII of the Income Tax Act. However,… Continue Reading

U.S. RESIDENTS PROVIDING SERVICES IN CANADA CAN HAVE A DEEMED PE

As a general rule, a U.S. resident carrying on business in Canada will be exempt from Canadian income tax on any profits from that business unless there is a “permanent establishment” (“PE”) in Canada. This is provided in Article VII(1) of the Canada-U.S. Tax Convention (“the Treaty”). There are exceptions to this general rule. The… Continue Reading

CROSS-BORDER COLLECTION OF CANADIAN INCOME TAX LIABILITIES

It is well established that, as a general rule, a country cannot collect a liability for income tax in a foreign jurisdiction. Thus, a government will only be able to seize assets located within its borders to satisfy an outstanding tax liability. This, in part, is the reason that the Canadian income tax system depends… Continue Reading

DECISION IN CONRAD BLACK TAX CASE SHOWS “FLIP SIDE” OF ANTI-AVOIDANCE RULE FOR CANADIAN EMIGRANTS

Many tax practitioners were quite surprised by the decision of the Federal Court of Appeal (Black vs. Canada-2014 FCA 275) and the previous decision of the Tax Court of Canada, both in 2014, regarding Lord Conrad Black. On the face of it, I think most people were shocked by the notion that a Canadian expat who… Continue Reading