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 was a UK resident under the “tie-breaker” rule in Canada’s tax treaty with the UK (“the Treaty”) could be subject to Canadian tax on income that had no connection to Canada.
However, looking at the facts and the applicable law, the decisions (which the Supreme Court of Canada refused to review) made 100% sense, at least to me.
This is because of the fact that Lord Black was still a Canadian resident under our domestic tax laws due to his considerable ties to Canada. It was only for the purposes of the Treaty that he was considered a non-resident of Canada. As such, under our domestic law, he was subject to Canadian tax on worldwide income.
But, what about the treaty? Wouldn’t that protect him from Canadian taxation on the income assessed by the CRA, since it was not from Canadian sources?
The answer is “no”! The reason for that is the fact that under Article 27(2) of the Treaty, Lord Black was denied any protection from Canadian tax on that income because it was not remitted to the UK, and he was a “non-dom” paying tax on a remittance basis there.
To me, the most interesting aspect of this decision is the fact that it really brought into greater focus the significance and implications of subsection 250(5) of the Income Tax Act (“the Act”). Because of the fact that Lord Black emigrated from Canada before this provision was in effect (at least for individuals) it did not apply to him[1].
This provision states as follows:
” Notwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.”
In general terms, this means that if a person is a Canadian resident under the Act, whether as a result of being “factually resident” or resident as a result of the application of a deeming rule, that person will be deemed a non-resident if a “tie-breaker” rule in a tax treaty treats them as being resident of another country.
I must confess, that, prior to Black decisions, I would never have thought that this provision could be of any benefit to a taxpayer.
Rather, I always viewed this provision as being an anti-avoidance rule aimed at preventing taxpayers from having a “best of both worlds” scenario under which they would both:
- enjoy benefits, in terms of protection from Canadian tax, under a tax treaty, and,
- gain certain benefits from being treated as a Canadian resident under the Act
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In connection with the latter, these potential benefits could include the following:
- “Departure tax” (i.e. deemed disposition on ceasing to be resident) would not be applicable
- Withholding tax under Part XIII would not apply
- Withholding tax under Regulation 105 would not apply
- Notification and clearance issues under section 116 would not apply
- The taxpayer could control a Canadian corporation, and that corporation could still be a “Canadian controlled private corporation”.
I believe that most other commentators would likely have also failed to view subsection 250(5) as being anything other than an anti-avoidance provision prior to the Black case.
For example, the commentary on this provision in the leading tax reporting service in Canada simply states:
“Subsection 250(5) is intended to prevent a person from taking advantage of dual residency; for example, using provisions under the Act applicable to residents of Canada while at the same time claiming the protection of the provisions in an income tax treaty.”[2]
I also doubt that, when subsection 250(5) was added to the Act, the Ministry of Finance ever envisioned that this provision could benefit a taxpayer, and was strictly motivated by a desire to prevent the types of scenarios outlined above.
However, as the interesting and unusual facts in Black illustrate, subsection 250(5) can, indeed, be a Canadian expat’s best friend in certain situations.
Although UK treaty is the best-known example of one that denies treaty relief on unremitted income that is not taxed in the other country, it is certainly not the only one of Canada’s tax treaties that have such a provision.
For example, when Canada’s tax treaty with Ireland was the subject of a major overhaul in 2003, a similar provision was added[3].
In addition, Canada’s tax treaty with Singapore, which is also a potentially tax-friendly destination for Canadian expats, has a provision that denies treaty benefits on untaxed, unremitted income[4], as does our treaty with Barbados[5].
Getting back to Lord Black, if he had left Canada after subsection 250(5) came into effect, there would have been no basis for the CRA to have assessed him on the relevant income. He would have been deemed a non-resident under the Act, and the income was not from Canadian sources. Of course, in that event, he would likely have been hit with a whopping big bill for “departure tax” when he left!
[1] Subsection 250(5) generally only applies to individuals who emigrated after February 24, 1998.
[2] See ¶28,343A of Canadian Tax Reporter published by CCH Canada Limited
[3] Article 28(2)
[4] Article XXI
[5] Article XXX(5)
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
