CHAPTER 2
Liability for TaxProblem 1 (Basic)For each of the following
individuals, determine and explain the type of residency for tax
purposes for 2008. (a) Anthony entered Canada on March 1, 2008, and
worked as a domestic on a southern Saskatchewan ranch for the
remainder of the year. On December 15, 2008, Anthony's wife moved
to Canada with their three children and all of their belongings.
They plan to stay permanently in Canada.
(b) Lubie lived in Detroit throughout 2008 but was a full-time
employee in Windsor. She also investedheavily and traded large
volumes of shares and bonds in her own stock account in Windsor.
(c) Ephran, a computer programmer with Xion Corporation in Toronto,
accepted a transfer to Silicon Valley, California. On May 1, 2008,
he flew to California and began work on the same day. Most of his
belongings remained in Toronto until July 30, 2008. His common-law
spouse waited until this day, when the house was sold, the bank
accounts were closed, and her contract with the Toronto Public
School Board was fulfilled.
(d) Julia, a citizen of the United States, lived with her
parents in Canada from September 1, 2007 toApril 30, 2008 to attend
the University of Alberta. On May 1, she accepted an employment
position as a mountain bike guide in Colorado and resided there
until August 30, 2008. Then she returned to Edmonton to complete
her commerce degree. On January 1, 2009, Julia began her employment
with a public accounting firm in Canada.
11
12 Solution 1 (Basic)
Introduction to Federal Income Taxation in Canada:
Fundamentals
(a) As Anthony has made a fresh start in Canada on March 1,
2008, he is considered a part-year resident. Accordingly, he will
be taxed on his worldwide income from March 1 to December 31. Prior
to March 1, he would only pay tax on income from Canadian sources.
(b) Lubie has a continuing state of relationship with Canada. In
particular, all of her income is earned in Canada and she crosses
the border each day. She also carries on active trading in Canada
as well. All of the facts support that Lubie has a continuing state
of relationship with Canada; therefore, she is a resident in Canada
for tax purposes. The 183-day sojourner rule would not apply
because Lubie does not stay overnight. She will also be taxed in
the United States; therefore, she will have to apply for a foreign
tax credit on her U.S. return. (c) AlthoughEphran spent over 183
days in Canada before severing all of his ties, he is still
considered a partyear resident. This is because he made a clean
break from Canada and does not plan to return. Accordingly, he will
be taxed on his worldwide income from January 1 to July 30, 2008.
After July 30, he will only be taxed on income from Canadian
sources. (An argument could also be made that Ephran made a clean
break from Canada on May 1, 2008.) (d) Julia has a strong
continuing state of relationship with Canada even though she is a
U.S. citizen. Accordingly, she will be considered a resident of
Canada and taxed on her worldwide income. Citizenship is irrelevant
to a persons resident status in Canada, but Julia will also be
taxable in the United States. Consequently, Julia will be taxed in
both Canada and the United States and will need to apply for a
foreign tax credit.
Solutions to Chapter 2 Assignment Problems
13
Problem 2 (Advanced)[ITA: 2, 114, 250; IT-221R3] The client was
born and raised in Canada. After obtaining his MBA in 1968, he
began working as a consultant. In July 1976, the corporation of
which he was a major shareholder entered into a contract with a
Canadian Crown corporation to furnish consulting advice in Nigeria.
Services were to commence July 15, 1976 and end January 14, 1978. A
daily rate of fees was set, but total billings were not to exceed a
specified maximum. The contract also provided for moving, travel
and living expenses for the client and his dependants up to a
specified maximum. All fees and expenses were paid to the clients
corporation in Toronto. He continued to be a shareholder, director
and officer of the corporation and he remained very interested in
its activities. The corporation paid the client and was instructed
to deposit these payments in the clients Canadian bank account
which he continued to maintain for this purpose and for the
operation of the rental property that he owned. He felt that the
Canadian bank account was necessary because of foreign exchange
difficulties that he might otherwise encounter. He instructed the
corporation not to withhold any income taxes on these payments
because he intended to give up his Canadian residence status to
establish an international consulting business abroad upon
termination of the Nigerian contract. Since the client had little
time before leaving for Nigeria, he quickly rented the unit that he
had been occupying in a duplex that he owned, on a month-to-month
basis. He intended to sell the property when the market would
provide him with a reasonable profit. He arranged to have his
corporation manage the renting of this property for a fee which he
paid to the corporation. He stored his major furnishings and winter
clothing in Canada. His smaller household and personal effects were
shipped to Nigeria. He sold his car, cancelled his auto insurance
and a gasoline company credit card and obtained an international
drivers licence. He retained credit cards such as American Express,
Visa and MasterCard, as well as his RRSP accounts. Under the
contract he was also required to maintain his provincial health
insurance coverage. When he left Canada for Nigeria, he was
accompanied by his friend, Martha, who had been a part of his life
for over a year before their departure. She had obtained leave from
her university program of studies for the fall 1976 term. The
couple took up residence in a hotel suite that was converted into
an apartment at the Holiday Inn in Lagos, Nigeria. No conventional
living quarters were available, because of the housing market.
During his stay in Nigeria, the client obtained a Nigerian drivers
licence and maintained two bank accounts and two cars. He joined
sports, dining and social clubs in Lagos. He was provided with an
office by the Nigerian government and he carried business cards
which identified him as a consultant with that government. He
promoted the consulting business of his Toronto corporation
actively in Nigeria in the hope of establishing the business
abroad, but he did not generate sufficient business to stay in
Nigeria beyond the period of the existing contract. He did not seek
to extend his visa or pay any form of tax on his income in Nigeria.
Martha returned to Canada for the winter 1977 term, and then
returned to Nigeria for the summer of 1977, but returned again to
Canada in September 1977 to begin a new program. By December 1977
the client had billed the limit under the contract. He vacated his
apartment, sold his cars, packed up his possessions, including some
artwork, textiles and other souvenirs that he had acquired, and
returned to Canada. REQUIRED Prepare a memo for the tax person in
your firm who will advise the client on the income tax consequences
of these facts. Evaluate in detail the alternatives in the
residence issue as they relate to this fact situation. Discuss each
possible degree of residence and its tax consequences. State your
conclusions on the case after weighing the significance of the
facts considered.
14 Solution 2 (Advanced)
Introduction to Federal Income Taxation in Canada:
Fundamentals
[Reference: Glow v. The Queen, 92 DTC 6467 (F.C.T.D.)] (A)
Full-time resident: taxed in Canada on worldwide income for the
whole year; Criterion: continuing state of relationship with
Canada; i.e., ties; Evidence: born, raised and educated in Canada,
agreed to short-term contract abroad, contract provided for living
expenses, indicating the temporary nature of the stay abroad, fees
under the contract were paid to the clients Canadian corporation,
he continued as a shareholder, director and officer of the Canadian
corporation, he maintained an interest in the activities of the
Canadian corporation, he maintained a Canadian bank account, he
owned a rental property in Canada, he arranged a rental on a
month-to-month basis to allow him to resume his habitation of the
residence on short notice, he stored his major furnishings and
winter clothing in Canada, indicating an intention to return, he
retained credit cards issued in Canada and his RRSP accounts, he
maintained his health coverage in Canada, he did not extend his
visa in Nigeria, indicating an intention to return, he did not pay
income tax in Nigeria, indicating a lack of permanence in his stay
there, his girlfriend returned to Canada, spending only a fall term
and a summer in Nigeria with him, indicating a lack of permanence
in his stay, he returned to Canada, leaving nothing in Nigeria. (B)
Deemed full-time resident of Canada: taxed in Canada on worldwide
income for the whole year; Criterion: sojourned in Canada for an
aggregate of 183 days or more in the year [par. 250(1)(a)];
Evidence: when he was in Canada until July 1976, he was not
sojourning, despite being in Canada more than 183 days in that
year, therefore, deemed residence is not a possibility in this
particular case for 1976. (C) Part-time resident in 1976: taxed in
Canada on worldwide income for the part of the year while resident;
Criterion: clean break, i.e., severed ties in July 1976; Evidence:
the Canadian bank account was only to avoid foreign exchange
difficulties and to maintain his rental property, no withholding of
income tax on his fees, he intended to establish an international
consulting business abroad and to that end attempted to promote
such a business in Nigeria, he intended to sell his rental property
in Canada when market conditions were right and to this end he
arranged a rental on a month-to-month basis to facilitate a sale,
he moved his personal effects to Nigeria, he sold his car, he
cancelled his auto insurance and a gasoline company credit card, he
was accompanied to Nigeria by his girlfriend who stayed with him
when not in school, he rented an apartment in Nigeria because more
permanent accommodation was not available, he obtained a Nigerian
drivers licence, he maintained two bank accounts and cars in
Nigeria, he joined clubs in Nigeria, he had an office in
Nigeria,
Solutions to Chapter 2 Assignment Problems
15
his business cards identified him as a consultant to the
Nigerian government, the credit cards he kept could be used
internationally, he maintained his health coverage in Canada only
because it was a requirement of his contract. (D) Non-resident:
taxed in Canada on Canadian-source income; Criterion: employed in
Canada, i.e., performed services of employment in Canada; Evidence:
after leaving in July 1976, he was not providing services of
employment in Canada, therefore, non-resident taxable in Canada is
not a possibility in this case. (E) Conclusion: while the client
stated an intention to establish residence abroad, he was not
successful in doing so: in fact, he returned immediately at the
termination of a short-term contract, he did not sever his major
ties to Canada or establish strong ties abroad, his ties to Nigeria
were merely those necessary to sustain a lifestyle while there; OR
on the other hand, it could be argued that he made an effort to
establish a consulting practice abroad and the lack of business was
unforeseen and beyond his control, he attempted to integrate
himself into Nigerian society by living there and joining clubs,
his lack of more permanent housing was due to market conditions
beyond his control.
16 Problem 3 (Advanced)
Introduction to Federal Income Taxation in Canada:
Fundamentals
[ITA: 2, 114, 250; IT-221R3] The client is an electronic
engineer. He was born in Erith, England, on the 7th day of July
1946. During the relevant times the client held a valid passport
for the United Kingdom of Great Britain and Northern Ireland. The
passport declares him a British subject with a residence in the
United Kingdom with the right of abode therein. The passport was
issued on September 26, 1978 for a 10-year period. Prior to the
clients second marriage in 1981, his parents maintained a bedroom
for him in Kent, England. In 1981, the client married Cathy, a
Canadian citizen residing in Canada who had no income of her own
and was wholly dependent on the client. She has always resided
continuously in Canada. In June of 1981, a house near Apsley,
Ontario, was purchased by Cathy with money supplied by the client.
In September of 1982, Cathy borrowed money by way of a mortgage.
The client guaranteed the mortgage which has an affidavit attached
dated September 13, 1982 where he swore that he was not then a
non-resident of Canada. For a purchase of property in Ontario, he
would otherwise have had to pay a 20% non-resident land transfer
tax. During the three-year period at issue in this case, 1981 to
1983, the client regularly returned to Canada when not working.
Each time the client entered Canada, his passport was stamped by
Immigration Canada with the majority of the entries setting out a
date upon which he must leave Canada. The authorized period of stay
varied from five days to 45 days. On some of the stamps the word
visitor was written in by an immigration official. Throughout the
three-year period, the client was employed full-time by a
non-resident corporation and all work was performed outside Canada
on an oil rig at sea. All income was deposited directly into a
Canadian bank. The client indicated that he was charged in
Provincial Court for failure to file an income tax return for 1981
and was acquitted (likely on the basis that he was not required to
file in Canada for that year). During the three-year period, the
client indicated or claimed that he: (a) never filed a tax return
or paid income tax anywhere; (b) was not allowed to work in Canada;
(c) was given a fixed date to leave Canada on entry (i.e., not
allowed to stay in Canada); (d) could not join OHIP, pay El,
maintain an RRSP or join a pension plan; (e) was out of the country
more than 183 days per year; (f) had no desire to work in Canada;
(g) had a residence in Britain in the home of his mother and
father; (h) held a mortgage in Britain on his first wifes house;
(i) could not live a normal life in Canada as he had to leave every
27 days; and (j) had a bank account with the Royal Bank of Canada
both in Canada and the Caribbean. In 1984, the client purchased a
car in Canada. In 1985, the client: (a) obtained a Canadian drivers
licence; (b) obtained a Canadian visa; and (c) became a landed
immigrant in Canada. REQUIRED Prepare a memo for the tax person in
your firm who will advise the client on the income tax consequences
of these facts. Evaluate in detail the alternatives in the
residence issue as they relate to this fact situation for the
period in question. Discuss each degree of residence and its tax
consequences as it applies to this fact situation. Note that in
this case full-time residence under the common law principle could
only result from a fresh start at a point in time in the period in
question. Therefore, part-time residence would depend on there
being a period of non-residence prior to a fresh start, if any.
State your conclusion on this case after appropriately weighing the
significance of the facts considered. Your conclusion should
indicate whether the client became a full-time resident at any
point in the period or remained a non-resident throughout the
period. If you conclude that he became a full-time resident,
indicate the point in time when the fresh start was made.
Solutions to Chapter 2 Assignment Problems
17
Solution 3 (Advanced)[Reference: Lee v. M.N.R., 90 DTC 1014
(T.C.C.)] (A) Full-time resident of Canada after a fresh start:
taxed in Canada on worldwide income for the whole year; Criterion:
a continuing state of relationship, i.e., continuing ties with
Canada after a fresh start; Evidence of residence: although U.K.
passport indicated residence in U.K., can be resident in more than
one place, room in parents house maintained for his use before his
marriage, but not likely after that time, married in Canada to a
person who continued to reside in Canada, supported his wife who
was wholly dependent on him in Canada, his wife bought a house in
Canada with funds which he provided, house mortgaged in Canada with
a guarantee provided by the client, he provided an affidavit with
the mortgage in which he swore that he was not a non-resident, he
regularly returned to Canada length of stay is not determining (see
Thomson case), the use of the term visitor by immigration officials
does not mean that the term is applied with the same meaning under
the Act, income from his employment was deposited to a Canadian
bank account, he never filed or paid income tax anywhere it must be
assumed that every person has at all times a residence (see Thomson
case), the mortgage on his first wifes house in Britain and the
Caribbean bank account may have been simply a foreign investment of
a resident of Canada, after the period in question, i.e., 1981 to
1983 he purchased a car, he obtained a Canadian drivers licence, he
obtained a Canadian visa, he became a landed immigrant. (B) Deemed
full-time resident of Canada for the years in question: taxed in
Canada on worldwide income for the whole year; Criterion: sojourned
in Canada for an aggregate of 183 days or more in a year [par.
250(1)(a)]; Evidence: he may have been sojourning when he regularly
returned to Canada, but he was out of the country more than 183
days per year. (C) Part-time resident in Canada after a fresh start
and not resident before that time: taxed on worldwide income for
the part of the year after the fresh start; Criterion: fresh start
preceded by a period of non-residence; Evidence of non-residence:
history in England, U.K. passport held throughout the period in
question passport indicates residence in U.K., parents maintain a
room in England available for his use at any time, affidavit on
which he swore that he was not a non-resident was not for income
tax purposes but for Ontario land transfer tax, the concept of a
non-resident for the transfer tax may differ from that for income
tax, on his entry to Canada, the length of his stay was limited by
the setting of a date for his departure, immigration officials
considered him to be a visitor on stamping his passport, he was
employed on a full-time basis outside of Canada he indicated that
he did not want to work in Canada,
18
Introduction to Federal Income Taxation in Canada:
Fundamentals
he was acquitted of failure to file a 1981 tax return in Canada,
likely because he was not required to file, he was not allowed to
work in Canada, he could not join OHIP, pay El, maintain an RRSP or
join a pension plan in Canada, he held a mortgage in Britain on his
first wifes house, he had a bank account in the Caribbean, the bank
account in Canada may have been for convenience or an investment
like any other that a nonresident might make in Canada. (D)
Non-resident throughout the period in question: taxed on
Canadian-source income; Criterion: employed or carried on business
in Canada; Evidence: during the period in question he was neither
employed nor carried on business in Canada. (E) Conclusion: he
cannot be deemed a full-time resident, because he does not meet the
criterion, if he is held to be a non-resident throughout the period
in question, he will not be taxable in Canada because he has no
Canadian-source income, therefore, either he made a fresh start at
some point in the period or he was a non-resident throughout the
period, his ties to Canada appear to have begun with his marriage
in June of 1981 and the subsequent purchase of a matrimonial home
to which he returned regularly, at least, he could be considered to
have become a resident in September of 1982 when he swore that he
was not a non-resident. Note: A conclusion for non-resident is
acceptable, if an argument for a weighing of the facts in that
direction is presented.
Solutions to Chapter 2 Assignment Problems
19
Problem 4 (Advanced)[ITA: 2, 114, 250; IT-221R3] The client is a
mechanical engineer, born and educated in England. The client was
married in England in 1962, and he and his wife, Dawning, had three
sons born in 1964, 1966 and 1969. In 1967, the client and his wife
and family moved to Canada where he immediately commenced
employment with Imperial Oil in Sarnia, Ontario. With Imperial Oil
and/or its parent corporation, Exxon Corporation, the client and
his family moved to various locations throughout Canada until 1988.
In 1988, while residing and working in Edmonton, Alberta, the
client was offered the position as deputy manager of the Exxon
refinery at Port Dickson in Malaysia. He accepted the position
because it presented the opportunity to likely become manager of
this same refinery within a three-year period. At the time of his
acceptance of the above position, the client and his wife were
experiencing marriage difficulties. As a result of these
difficulties, it was mutually agreed that the client would go to
Malaysia on his own. His wife and youngest son remained in the
family home in Edmonton. His older sons were living on their own by
this time. The client and his employer undertook the following
steps in preparation for his move from Canada: his employer
obtained a work permit for him in Malaysia; he sold his car; he
cancelled his provincial health plan; his employer obtained private
health insurance for him; he closed all of his existing bank
accounts at Royal Bank; he opened a savings account at the Bank of
Nova Scotia because this bank had a branch in Kuala Lumpur, the
capital of Malaysia; he allowed his membership in the Edmonton
Petroleum Club to lapse; and he allowed his participation in the
Model Guided Plane Association to lapse. The client moved to
Malaysia in the last few days of September 1988. He stayed in a
hotel in Malaysia for the first few weeks and then moved into a
company-provided home. His employer charged him with a monthly rent
of $1,000 for his use of this house. He took the following items
with him from Canada to Malaysia: all of his clothes and personal
effects; and an airplane kit for model guided planes and a radio
control transmitter for his hobby of model guided planes. Once in
Malaysia, the client undertook to establish Port Dickson as his
home. To this end, he: purchased a car; obtained a Malaysian
drivers licence; joined the Port Dickson yacht club which was, in
fact, a social/recreational club; joined the petroleum club at
Kuala Lumpur; opened a chequing account at the Bank of Nova Scotia
in Kuala Lumpur; opened a chequing account at the Standard
Chartered Bank at Port Dickson; acquired two Malaysian credit
cards; became a patient at a Port Dickson medical clinic and, as
well, made regular visits to a dentist in Port Dickson; and joined
the Port Dickson Golf Club in 1991. In accordance with Exxon
corporate policy, the client remained on the payroll and in the
pension plan of the Canadian subsidiary. His monthly pay was
deposited into his Edmonton bank account. There was no income tax
withheld at source on the clients salary because the Canadian
subsidiary knew that he was working full-time outside of Canada.
The total cost of his salary and related benefits (including
pension) were charged by the Canadian subsidiary to Exxon
Corporation International. The client made only two visits to
Canada during the period from 1989 through 1994. He visited for 14
days in 1990 and 14 days again in 1992. On each of these visits, he
stayed in the family home in Edmonton. During the same period, the
clients spouse made eight visits to him in Malaysia. She made no
visits after January 1992, but prior to that time, the length of
her visits ranged from 19 days to 32 days. On each of these visits,
she stayed with the client in his Malaysian home. The client and
his wife remained married throughout the relevant period. The
client maintained the following Canadian investments while he was
residing in Malaysia:
20
Introduction to Federal Income Taxation in Canada:
Fundamentals
his 50% interest in the family home in Edmonton; a 50%
investment in a rental property which his wife purchased after his
move to Malaysia, because she thought it would be a good
investment; his RRSP; his company savings plan; and a few personal
shares in Canadian public companies. He did maintain his
memberships in the Canadian Society of Mechanical Engineers and the
Association of Professional Engineers and Geologists of Alberta.
The client became manager of the Port Dickson plant in 1991 and
eventually retired from Exxon in the summer of 1995 under the terms
of an early retirement package. Upon retirement from Exxon, the
client returned to Edmonton to the family home. In late 1995 the
client started seeking employment in Malaysia and in January 1996
he and his wife went to Malaysia hoping that he would find
employment and they would both live there. His wife returned to
Canada in February 1996 and he moved on to Thailand where he stayed
through July 1997 (working for the 12-month period from August 1996
through July 1997). When the Thailand employment ended, the client
returned to Canada. He and his wife then worked out a plan of
separation. REQUIRED Prepare a memo for the tax person in your firm
who will advise the client on the income tax consequences of these
facts. Evaluate in detail the alternatives in the residence issue
as they relate to this fact situation for the period October 1,
1988 through the summer of 1995. Discuss each possible degree of
residence and its tax consequences. State your conclusions on this
case after weighing the relevance of the facts you have
considered.
Solutions to Chapter 2 Assignment Problems
21
Solution 4 (Advanced)[Reference: Dale Boston v. The Queen, 98
DTC 1124 (T.C.C.)] (A) Full-time resident of Canada: taxed in
Canada on worldwide income for the whole year(s) in question;
Criterion: a continuing state of relationship, i.e., continuing
ties with Canada Evidence of residence: during the entire period in
question his wife and 3 children (including one minor child)
remained in Canada; he had the family home in Edmonton available to
him throughout the entire period in question as his wife and
youngest son continued to reside in this home; he remained on the
payroll of the Canadian subsidiary of Exxon; his monthly pay was
deposited into his Edmonton bank account; he remained a member of
the pension plan of the Canadian subsidiary of Exxon; he did
maintain some Canadian investments: his 50% interest in the family
home in Edmonton, a 50% investment in rental property which his
wife purchased after his move to Malaysia because she thought it
would be a good investment, his RRSP, his company savings plan, and
a few personal shares in Canadian public companies. (B) Deemed
full-time resident of Canada for the years in question: taxed in
Canada on worldwide income for the whole year(s) in question;
Criterion: sojourned in Canada for an aggregate of 183 days or more
in a year [par. 250(1)(a)] Evidence: he may have been sojourning
when he came to Canada for brief periods during 1990 and 1992; but
in neither of these years did he sojourn for a period in aggregate
of 183 days; visits were 14 days in each of 1990 and 1992 and no
days during 1989 and 1991, 1993 and 1994 and 1995 prior to his
return during the summer. (C) Part-time resident in Canada in year
of clean break or resident before the time: taxed on worldwide
income for the part of the year prior to the clean break.
Criterion: clean break, i.e., severed ties in September 1988
Evidence: his employer obtained a work permit for him in Malaysia;
he sold his car in Canada; he cancelled his Canadian provincial
health plan; his employer obtained private health insurance for
him; he closed all of his existing bank accounts at the Royal Bank;
he opened a savings account at the Bank of Nova Scotia because this
bank had a branch in Kuala Lumpur, the capital of Malaysia;
although he was paid by the Canadian subsidiary of Exxon, the cost
of his pay was transferred from the Canadian subsidiary to Exxon
International; no Canadian income taxes were withheld at source on
his salary; he allowed his membership in the Edmonton Petroleum
Club to lapse; he allowed his participation in the Model Guided
Plane Association to lapse; although his wife remained in Canada,
their marriage was unstable throughout the period in question and
thus her presence in Canada cannot be considered a strong tie; he
was employed in Malaysia in a senior managerial capacity; he hoped
to stay on after the initial three years and in fact did remain for
close to another four years;
22
Introduction to Federal Income Taxation in Canada:
Fundamentals
he maintained a dwelling in Malaysia in which he slept, took his
meals, and kept his personal effects; he joined the local Malaysian
yacht club; he opened Malaysian bank accounts and obtained local
Malaysian credit cards; he purchased a car in Malaysia and obtained
a Malaysian drivers licence; he did not come back to Canada at all
in 1989 or 1991 or for the period 1993 through the summer of 1995;
he returned only briefly during 1990 and 1992. (D) Non-resident
throughout the period in question: taxed on Canadian-source income;
Criterion: employed or carried on business in Canada Evidence:
during the period in question, he was neither employed nor carried
on business in Canada; although his pay was from a Canadian
subsidiary of Exxon, his employment was outside of Canada. (E)
Conclusion: he cannot be a deemed full-time resident, because he
does not meet the 183-day criterion; if he is held to be
non-resident throughout the period in question, he will not be
taxable in Canada because he has no Canadian-source income;
therefore, either he made a clean break at some point or he was a
full-time resident throughout the period; his ties to Canada quite
clearly appear to have been severed in September 1988 when he moved
to Malaysia to commence his new position; he may have
re-established ties to Canada in the summer of 1995 when he retired
from Exxon and returned to Canada or in July 1997 when his
employment in Thailand ended; for the period from September 1988
through the summer of 1995 he appears to have been a nonresident of
Canada.
Solutions to Chapter 2 Assignment Problems
23
Problem 5 (Basic)For each of the following corporations,
determine and explain the type of residency, for tax purposes for
2008. (a) ABI, incorporated in Montreal, Quebec, in 1979, carries
on a clothing manufacturing business in Hong Kong. All directors'
meetings and staff meetings are held in Hawaii, United States, each
year. (b) Nickel Company, incorporated in the Bahamas in 1966,
operates a mining business in Northern Ontario. All profits are
paid out as dividends directly into a Swiss bank account. All books
and records are maintained in the president's office in Ontario.
The company directors all live in Toronto and meet monthly for
their directors' meeting. (c) Saffron Ltd. is a 40% subsidiary of a
Canadian corporation located in Houston, Texas. The products
manufactured by Saffron are sold directly to the Canadian market.
No revenues are earned from U.S. sales.
24 Solution 5 (Basic)
Introduction to Federal Income Taxation in Canada:
Fundamentals
(a) Since ABI is incorporated in Canada after 1965, the company
will be taxed on its worldwide income throughout the fiscal year
regardless of where its operations and control occur. (b) Even
though Nickel Company is incorporated outside of Canada, the facts
indicate that the corporations mind and management reside in
Canada. The fact that all of the directors and the president live
in Canada, maintain all of the books and records in Ontario, and
meet in Toronto for their monthly directors meetings, clearly
indicates the mind and management of the corporation is in Canada.
Accordingly, it will be taxed on its worldwide income throughout
the year. (c) Saffron Ltd. is considered a resident of the United
States for tax purposes. The corporation would be taxable in the
United States. Since the sales are direct, and no branch exists in
Canada, the corporation is not subject to any income tax in
Canada.
Solutions to Chapter 2 Assignment Problems
25
Problem 6 (Basic)[ITA: 2, 250, 253] Far Eastern Airlines is a
company incorporated in Korea in 1974. Its general manager and
other active officers of the company are resident in Korea and have
their offices there. The directors and corporate officers of the
company live in Korea as well. During the year in question, its
sole business was operating an international airline which had no
landing rights in Canada. However, in that year it had raised
capital on the Canadian market for its international operations by
selling an issue of its stock through an investment dealer in
Vancouver. The vice-president finance of the company, who believed
the stock issue would sell better in Canada, travelled from the
head office in Korea to Vancouver to instruct the investment
dealer. The stock issue was highly successful and the proceeds of
the issue were accumulated in a bank account in Vancouver. During
the several months in the year in question when these funds were
being accumulated, the company became aware of an opportunity to
purchase a vast quantity of aviation fuel at a very low price. A
purchasing agent was dispatched from the head office in Korea to
Canada to complete the purchase using some of the funds accumulated
from the stock issue. The fuel was stored in Canada temporarily in
rented facilities pending shipment to San Francisco, where it could
be used by aircraft landing there. Subsequently, the company was
unable to make suitable arrangements for shipment. The fuel was
sold to a Canadian buyer at a considerable profit. All contracts
involved in the purchase and sale transactions were drawn up by a
Canadian lawyer under the direction of the purchasing agent who
operated from a hotel room in Vancouver during the period of the
transactions. REQUIRED Prepare a memo for the tax person in your
firm who will advise Far Eastern Airlines on the income tax
consequences of these facts. Evaluate in detail the alternatives in
the residence issue as they relate to this fact situation. Discuss
each possible degree of residence and its tax consequences. State
your conclusions on the case after considering the relevant
international tax agreement and after appropriately weighing the
significance of the facts considered.
26 Solution 6 (Basic)
Introduction to Federal Income Taxation in Canada:
Fundamentals
(A) Full-time residence taxed on worldwide income: (i) where
central management and control actually abides, central management
and control in Korea, general manager and other active officers
live in Korea and have their offices there, directors live in
Korea; (ii) on the other hand, company had a bank account in
Canada, company used the services of a Canadian investment dealer
and a Canadian lawyer, purchase and sale transactions were made in
Canada. (B) Deemed residence under subsection 250(4) taxed on
worldwide income: (i) must be incorporated in Canada, cannot be
deemed resident because incorporated in United States. (C)
Non-resident taxed only on Canadian-source income [par. 2(3)(b)]:
(i) must carry on business in Canada, 1. definition of business
includes an undertaking of any kind whatever and an adventure in
the nature of trade [ssec. 248(1)], purchase and sale of aviation
fuel could be an adventure in the nature of trade; 2. definition of
carrying on a business includes offering anything for sale in
Canada [par. 253(b)], sale of shares and aviation fuel would both
be included in the extended meaning of carrying on of business in
Canada; 3. in the Tara case, the Court stated that an adventure in
the nature of trade does not in itself constitute carrying on a
business in Canada within the meaning of the words carrying on
business (see also IT-459, par. 3), the transaction could be
considered to be part of the larger activity and, therefore not an
isolated transaction; the purchase of fuel was part of the usual
business that it was actively carrying on to carry on something
involves continuity of time or operations as contemplated in the
ordinary sense of a business; the purchase transaction in question
was one of many of that nature over time the activities must be
engaged in on a continuing basis, rather than as an isolated
transaction to fall within paragraph 253(b). (D) Effect of
CanadaKorea Income Tax Convention possible exemption from tax: (i)
business profits not earned from a permanent establishment in
Canada are not taxed in Canada, 1. even if considered to be
carrying on a business in Canada, insufficient evidence to
substantiate a permanent establishment as defined in Article 5,
nothing more than a bank account, temporarily rented storage
facilities, and arrangements with an investment dealer and a
lawyer. (E) Conclusion: (i) not resident in Canada because central
management and control appear to be in Korea, (ii) it may be
considered to have carried on business in Canada, however, the tax
that would otherwise be paid from the carrying on of business is
exempted by the CanadaKorea Income Tax Convention, because it did
not carry on business through a permanent establishment in
Canada.
Solutions to Chapter 2 Assignment Problems
27
Problem 7 (Advanced)[ITA: 2, 250, 253] Wong Computer Games Inc.
(WCG) was incorporated in the state of Illinois in the last decade.
The founding shareholder, Mr. Andrew Wong, is an inventor of
computer simulation models. His products include a wide variety of
computer games as well as some programs which have industrial
applications. Mr. Wong is the controlling shareholder of WCG. His
brother owns a minority interest, as does Walter Bends, a long-time
associate of Mr. Wong, who often collaborates in the development of
new products. All three shareholders are resident in Chicago. In
addition to Mr. Wong, the WCG Board of Directors includes George
Wolf, who represents the Chicago law firm, which advises WCG, and
Tony Aster who represents First National Bank of Chicago, which
provides most of the financing for WCGs operations. The Board meets
approximately every six months to review financial results, discuss
product development and decide on strategic initiatives. The
meetings are usually held in the boardroom of George Wolfs law
firm. Two years ago, Mr. Wong achieved an industry breakthrough
when he developed his latest game, SuperPilot. SuperPilot is a
computer game in which the operator attempts to safely land a
disabled airliner. SuperPilot provided special effects which were
far beyond those available in any other commercially available
product. Although other WCG products were only available in the
U.S. market, Wong was convinced that SuperPilot would be a global
success. To ensure the competitive advantage would be maintained,
Wong Computer Games Inc. took the required legal steps to ensure
copyright and patent protection of the program in a variety of
countries, including Canada. By last year, SuperPilot was doing
very well in the U.S. market and WCG began to launch the product in
other markets. Walter Bends was assigned responsibility for the
Canadian market and took a short-term lease on a Toronto apartment
in March of last year. WCG established a bank account with a
Toronto branch of a Canadian bank. This account was to be used by
Bends for promotional expenses and other incidentals. All other
expenses, including Bends salary, continued to be paid from
Chicago. Bends attended a number of Canadian trade shows,
exhibiting the SuperPilot program. Prospective purchasers were
provided with SuperPilot game cartridges as a promotional item.
Bends was given the authority to sign supply contracts which would
permit the purchaser a one-month supply of cartridges. At the end
of the one month, if the distributor was still interested, a
longer-term supply contract would be required. Bends was not
permitted, however, to sign any of these long-term agreements
without receiving prior approval from the WCG Board. All game
cartridges, including promotional cartridges, were supplied from
Chicago. If the product began to sell well in Canada, the WCG Board
had discussed establishing a Canadian warehouse. By January of this
year, it became obvious that SuperPilot was not going to be a
Canadian success. No distributors had requested a long-term supply
contract and only one, Petes Gaming Emporium, had agreed to stock
the product for one month. At the end of the month, sales had been
so slow that Petes was not interested in continuing the
relationship. Bends returned to Chicago, the bank account was
closed, and WCG refocused its marketing efforts on the U.S. market.
REQUIRED Prepare a memo for the tax person in your firm who will
advise WCG on the income tax consequences of these facts. Evaluate
in detail the alternatives in the residence issue as they relate to
this fact situation during last year and this year. Discuss each
possible degree of residence and its tax consequences and by
stating your conclusions on the case after appropriately weighing
the significance of the facts considered.
28 Solution 7 (Advanced)
Introduction to Federal Income Taxation in Canada:
Fundamentals
(A) Full-time residence Taxed on worldwide income: where central
management and control abides; central management and control
abides in the U.S.; controlling shareholder, Board of Directors in
the U.S.; U.S. is major market; Canada is incidental; on the other
hand; company had a bank account in Canada; had an employee in
Canada; short-term supply contracts made in Canada; but contracts
more promotional; longer-term contracts required U.S. approval. (B)
Deemed residence Taxed on worldwide income [ssec. 250(4)]: must be
incorporated in Canada; WCG incorporated in the U.S.; therefore,
cannot be deemed resident. (C) Non-resident Taxed only on
Canadian-source income [par. 2(3)(b)]: must carry on business in
Canada; activities mostly promotional; but did conclude one
short-term contract in Canada; business includes an adventure in
nature of trade; activity may be considered an adventure in nature
of trade because of isolated sale, marketing effort for one
product; possible argument that adventure in nature of trade does
not constitute carrying on a business, because of lack of
continuity. (D) Effect of CanadaU.S. Income Tax Convention: even if
carrying on a business in Canada, business profits must be from a
permanent establishment in Canada to be taxable in Canada; no
business address in Canada; only employee with short-term
accommodation in Canada. (E) Conclusion: not resident in Canada
because of central management and control in the U.S.; unlikely to
be considered to have carried on business in Canada; event may be
adventure in nature of trade, but no continuity; no Canadian
permanent establishment so Treaty exempts the corporation from
Canadian taxation of any business profits.
Solutions to Chapter 2 Assignment Problems
29
Problem 8 (Advanced)[ITA: 2, 250, 253] Capitol Life Insurance
Company (Capitol) was incorporated in the United States in the
state of Colorado at the turn of the century. Its head office had
always been in Denver, Colorado. Capitol was a subsidiary of
Providence Capitol Corporation which in turn was a subsidiary of
Gulf & Western Industries Inc. (Gulf). Gulf owned approximately
600 subsidiaries, 240 of which were in turn owned by Associates
Corporation of North America (Associates). Six of these latter
corporations were Canadian companies. Capitol was in the business
of writing individual and group life and health insurance policies.
Capitol also wrote creditors group life and health insurance
policies for the 240 finance companies which were part of the Gulf
group of companies. Under a creditors group insurance policy,
Capitol would pay to the finance company, upon the death or
disability of the borrower, the outstanding amount of the loan in
the case of death or the required instalment payments in the case
of disability. The costs of the insurance were effectively passed
on to the borrower, either as a separate charge or as a higher
interest rate. In the late 1960s, Capitol planned to expand into
Canada and obtained licences in nearly every province and obtained
federal registration under the Foreign Insurance Companies Act
(FICA). The FICA registration required that Capitol name a chief
agent in Canada and that he be given a power of attorney. Capitol
was also required to make deposits with the insurance
superintendent and maintain assets in Canada. Two bank accounts
were opened in Canada. The planned expansion into Canada was
cancelled. However, the licences and registration were maintained.
This required that Canadian representatives and agents be retained
as locations for the licensing authorities to serve legal notices.
All reports to the licensing authorities and all inquiries of the
licensing authorities were to be passed through the Canadian chief
agent. The reports to the licensing authorities were prepared in
Denver and all inquiries were passed on to Denver by the chief
agent. The chief agent was required to maintain copies of records
required by the superintendent of insurance. None of Capitols
representatives or agents ever solicited insurance or were expected
or authorized to do any business. The chief agent countersigned the
cheques on Capitols general bank account on the requirement of the
insurance superintendent. He had no means to verify the legitimacy
of the cheques; as all books and records were maintained in Denver
where the cheques were prepared. The agent later deposited the
premiums received in an effort to streamline the former procedure
of having the premiums sent to Denver and then sent back to Canada
through the bank for deposit into the Canadian general account to
meet licensing requirements. All investments were administered and
managed in Denver. Capitol did not have anyone in Canada who
solicited insurance business, collected premiums, processed or paid
claims, administered investments or countersigned any claim
cheques. Capitol had five group insurance contracts under which the
lives of Canadian residents were insured. These policies were all
issued to affiliated companies without solicitation in Canada. Two
of these policies were creditors group insurance policies with
Associates. They were each drafted in accordance with Denver law
and signed in Denver by the president of Associates, who was a
resident of Indiana. Associates was shown as the insured company
and paid all premiums. On the insistence of the Canadian insurance
authorities, the wording of the agreements was amended to reflect a
premium collection fee. The original agreement provided for a
retroactive adjustment of premiums based upon past claim
experience. Capitol and Associates continued to administer,
interpret and apply the agreement in the same manner as the
original agreement. Blank insurance certificates were also required
to be issued so that they could be provided to borrowers whose
loans were insured as a way of informing them of the terms of the
coverage. The coverage took place independently of the issuance of
a certificate to an individual. These certificates listed the
Canadian head office of Capitol as being in Don Mills, Ontario, as
required by the federal insurance superintendent. This office was
never used as a head office. The federal insurance superintendent
also required the issuance of a brochure for the information of the
Canadian borrowers whose lives and health were insured. The income
that Capitol received from the Canadian insurance and investments
represented a very small proportion of its total revenue. Canadian
operations were not kept separately from U.S. operations, no Denver
personnel were charged with Canadian operations, and there were no
special Canadian claim forms or procedures. The only separation of
Canadian business from U.S. operations to be found in the accounts
of Capitol was to comply with the Canadian insurance authorities.
All corporate meetings as well as all levels of management took
place in the United States. REQUIRED Prepare a memo for the tax
person in your firm who will advise Capitol on the income tax
consequences of these facts. Evaluate in detail the alternatives in
the residence issue as they relate to this fact situation. Discuss
each possible degree of residence and its tax consequences. State
your conclusions on this case after weighing the relevance of the
facts you have considered.
30 Solution 8 (Advanced)(A)
Introduction to Federal Income Taxation in Canada:
Fundamentals[Reference: Capitol Life Insurance Company v. The
Queen, 84 DTC 6087 (F.C.T.D.)] Full-time resident: taxed in Canada
on worldwide income for the whole year: (i) where central
management and control actually abides, central management and
control in Denver, all corporate meetings as well as all levels of
management took place in the United States, Canadian operations
were not kept separately from U.S. operations, no Denver personnel
were charged with Canadian operations and there were no special
Canadian claim forms or procedures, all investments were
administered and managed in Denver, (ii) on the other hand,
certificates listed the Canadian head office of Capitol as being in
Don Mills, Ontario, the chief agent countersigned the cheques on
Capitols general bank account. Deemed full-time resident: taxed in
Canada on worldwide income [ssec. 250(4)]: (i) must be incorporated
in Canada, cannot be deemed resident because incorporated in the
United States. Non-resident: taxed in Canada on Canadian-source
income [par. 2(3)(b)]: (i) must carry on business in Canada, as
evidenced by: the authority and duties of the chief agent, the
federal and provincial registrations and licensing, the powers of
attorney deposited with the federal and provincial departments of
insurance, the operating Canadian bank accounts, listing of Don
Mills, Ontario as the Canadian head office of Capitol, the moneys
on deposit in Canada pursuant to a special trust, the wording
change to the agreements to refer to a premium collection fee on
the insistence of the Canadian insurance authorities, the brochure
was issued to Canadians, (ii) on the other hand, all of these
activities resulted from the requirement to comply with the
superintendent of insurance and would not have otherwise existed,
except for the Canadian banking facilities which were maintained to
expedite the transfer of funds, the maintenance of registration
under FICA served to avoid duplications in provincial jurisdictions
with respect to such matters as the amount of deposits required to
be maintained to guarantee the fulfillment of obligations, the
completion of contracts with a Canadian company, Associates, does
not constitute doing business in Canada, as the contracts were made
in the United States, the individuals whose lives and health were
covered by the insurance were Canadians. However, it was Associates
who was insured, not the individuals. Effect of CanadaU.S. Income
Tax Convention: business profits must be attributable to a
permanent establishment in Canada to be taxable in Canada, there
was no permanent establishment in Canada. Conclusion: not resident
in Canada, as central management and control were exercised in
Denver, had not carried on business in Canada, as insurance
policies were all signed in the United States and all other
activities in Canada were undertaken to comply with insurance
regulations, except for the nature of the deposits to the Canadian
accounts (which was a minimal level of activity).
(B)
(C)
(D)
(E)
Solutions to Chapter 2 Assignment Problems
31
Advisory CaseCase 1: Transfer to France Sally has just come to
you for advice on a possible job transfer to Paris, France. She is
currently working for a large private corporation located in St.
Catharines, Ontario. It is now April and the president of the
company has asked Sally, who is the company's computer network
expert, to move to Paris for at least two years. Her time there may
extend beyond two years, but that will depend on the success of the
project she will be working on. Sally is married to Harry and they
have two daughters, ages six and eight. The company wants Sally to
be in Paris and working by May 15, so she will have to leave by May
10 to get there and settled in time. She is planning to rent a
furnished apartment when she arrives. Her children are in school
and won't be done until the end of June. Harry has his own career
as a school teacher and is willing to take an unpaid leave of
absence for two years, but he can't leave until the end of June or
middle of July at the earliest. Sally and Harry enjoy golf and have
recently joined a fairly exclusive club in the St. Catharines area,
after an eight-year waiting period and after paying a large
initiation fee. They do not wish to give up this membership. Their
home is located just outside the city on 20 acres and they are very
reluctant to sell it, as they would not be able to replace it on
their return. Both Sally and Harry grew up in the St. Catharines
area and their families still live there. Sally's parents and
Harry's parents are retired. Sally and Harry both want to move to
Paris, and they have come to you for tax advice on whether they
could be considered non-residents of Canada, or what, if anything,
they could do to achieve this result. ADVISORY CASE DISCUSSION
NOTES This is a planning situation. The students are to recommend
planning points that would support the desired result of the family
being non-resident. There are two main issues in this case. The
first is whether Sally and Harry will be able to support
nonresident status given their circumstances. The second is, if
they can argue non-resident status, what their date of clean break
is. Non-Resident Status There are two main issues with trying to
plan for this family to become non-residents: they need to support
their argument that they have severed ties to Canada, and they need
to establish that they have become residents of France. To sever
ties to Canada, Sally and Harry need to plan around the following
main issues: Length of stay in France: The family is going to be in
France for at least two years, but that may be extended. Clearly,
the shorter the stay, the greater the risk that they will not be
able to successfully defend nonresident status if challenged. Golf
club: Given that Sally and Harry do not want to give up their golf
club membership, they will need to see if the club has a
non-resident membership status that would allow them to keep their
membership, pay lower annual fees, and clearly indicate to the CRA
and others that they have left. However, a stronger case for
nonresidency could be made if they gave up their membership
altogether. It should be noted that the golf club nonresident
classification probably also applies to those who have moved to,
for example, another province. Home: While it is clearly best for
them to sell their home to establish a break in ties, they are
reluctant to do this. If they wish to keep it, they should rent the
property to a third party. In Interpretation Bulletin IT-221R3, in
paragraph 6, the CRA states:Where an individual who leaves Canada
keeps a dwelling place in Canada (whether owned or leased),
available for his or her occupation, that dwelling place will be
considered to be a significant residential tie with Canada during
the individual's stay abroad. However, if an individual leases a
dwelling place located in Canada to a third party on arm's length
terms and conditions, the CCRA will take into account all of the
circumstances of the situation (including the relationship between
the individual and the third party, the real estate market at the
time of the individual's departure from Canada, and the purpose of
the stay abroad), and may not consider the dwelling place to be a
significant residential tie with Canada except when taken together
with other residential ties (see 17 for an example of this
situation and see 9 for a discussion of the significance of
secondary residential ties).
If they do decide to keep the house, then this will increase
their risk of being considered residents of Canada.
32
Introduction to Federal Income Taxation in Canada:
Fundamentals
Harry is on leave, he did not resign: Harrys circumstances must
be considered in this case. He is not planning to resign from his
teaching position; instead, he is taking an unpaid leave. This
indicates a less permanent move. It would be a stronger argument
for non-resident status if he did resign. Family ties: Sally and
Harrys extended family ties are clearly still in Canada. There is
nothing they can do about this. Visits back to Canada: They will
need to be careful how often they come back to Canada on visits,
and how long they stay. The more frequent the trips, and the longer
the stays, the weaker the non-resident argument. Remember, the
courts can view the next few years to determine whether the family
severed their residential ties this year. Other issues: Sally and
Harry should also do the following: 1. Advise those authorities who
administer drivers licenses and medical coverage that they are now
nonresidents. 2. Close out their Canadian bank accounts or tell the
bank that they are non-residents so withholding tax can be deducted
from interest payments. 3. Move their investments to France and
make sure their advisers are notified of their non-resident status.
4. Indicate on their tax returns the date of ceasing to be resident
(see Date of clean break, below). Establishing residency in France:
For the family to be considered non-residents of Canada, they need
to have established residential ties somewhere elsein this case, in
France. The CRA, in paragraph 14 of Interpretation Bulletin
IT-221R3, states:Where an individual leaves Canada and purports to
become a non-resident, but does not establish significant
residential ties outside Canada, the individual's remaining
residential ties with Canada, if any, may take on greater
significance and the individual may continue to be resident in
Canada. However, the fact that an individual establishes
significant residential ties abroad does not, in and by itself,
mean that the individual is no longer resident in Canada, as the
Courts have held that it is possible for an individual to be
resident in more than one place at the same time for tax
purposes.
Renting a furnished apartment may be appropriate for Sally when
she first arrives, but she should find more permanent
accommodations when the family arrives. Date of clean break
Assuming the family can successfully argue that they have become
non-resident, you need to determine what day they officially
achieved this status. Sally is to be in France on May 15, so, if
she leaves May 10, is that the date? Alternatively, Harry and the
children will leave, say, July 15, so is that the date? The CRA, in
Interpretation Bulletin IT-221R3, at paragraph 15, states:It is a
question of fact to be decided with regard to all of the
circumstances of the case on what date a Canadian resident
individual leaving Canada becomes a non-resident for tax purposes.
Generally, the CCRA will consider the appropriate date to be the
date on which the individual severs all of his or her residential
ties with Canada, which will usually coincide with the latest of
the dates on which (a) the individual leaves Canada, (b) the
individual's spouse or common law partner and/or dependants leave
Canada (if applicable), or (c) the individual becomes a resident of
the country to which he or she is immigrating.
The first two of the three dates set out above are easy to
determine in this case. The third may be more difficult and is
discussed above. This is not a particularly significant issue in
that if you are arguing between May 10 and July 15it is only about
two months, and it only affects the tax return in the year of
departure. Conclusion There is always a risk that the CRA and the
courts will not agree with Sally and Harrys filing position that
they are non-resident. All the adviser can do is arrange the given
facts in the best way to minimize the risk. In this case, the risks
of reassessment centre on the following issues: 1. Keeping the home
2. Length of stay in France 3. Establishing residential ties in
France
Solutions to Chapter 2 Assignment Problems
33
Case 2: Move to Chile The plaintiff, Jennifer Marken, is a
21-year-old Canadian citizen and has always lived and worked in
Regina except for the last two years. During these two years, she
obtained a position as an English teacher for a local school in
Osorno, Chile. Originally, the two-year contract could have been
extended into a permanent position at Jennifer's option. However,
at the end of the two-year period Jennifer's brother became
suddenly ill and she opted to return to Regina and complete her
education degree. She is scheduled to appear in court next week to
claim that she was a non-resident of Canada during the two-year
period and therefore should not be liable for Canadian tax. Both
the CRA and Jennifer's counsel agree on the following facts:
Jennifer is a Canadian citizen and all of her direct family resides
in Saskatchewan. Jennifer's fianc visited her five times during the
two-year period and lived in Chile during his summer vacations. He
plans to complete his accounting designation with a Canadian firm
in Saskatchewan. All of Jennifer's income during the two-year
period was paid by the Chilean school (January 2005 January 2007).
Upon departing for Chile, Jennifer put all of her furniture in
storage and leased her car to her younger sister on a
month-to-month basis. Her household belongings were shipped to
Chile. While in Chile, she maintained her provincial health care
policy, her Canadian savings account and a Canadian American
Express card. She cancelled her Canadian chequing account, and her
Canadian Visa card. Before leaving, she cancelled all of her club
memberships and abdicated her position as the honorary chair of the
Beta Gamma Phi sorority. While in Chile she made no attempt to
learn the Spanish language and did not join any Chilean
organizations. She rented a one-bedroom apartment from another
Canadian living in Osorno. Over the two-year period, Jennifer
visited Canada each Christmas, at Easter, and for the marriage of
her best friend. Her total number of days in Canada over the
two-year period amounted to 50 days.
Jennifer's litigation counsel would like your advice on the
income tax options for the two-year period during which Jennifer
worked in Chile. Provide your perspective on the facts that support
each place of residence and the tax consequences they entail. Weigh
the relevance of the facts and conclude on the likely outcome in
this situation. ADVISORY CASE DISCUSSION NOTES In this case, it is
necessary to determine Jennifers residency status for tax purposes.
Since residency is not defined in the Act, it is necessary to
consider the facts underlying each case. As a full-time resident of
Canada, Jennifer would be taxed on her worldwide income over the
two-year period. The facts that support this status are: (1)
Jennifers Canadian background and her permanent return to Canada at
the end of the two years; (2) her return visits to Canada; (3)
Jennifer retained a Canadian bank account and her Canadian American
Express credit card; (4) she kept substantial assets (i.e.,
furniture and car) in Canada; (5) her family and social ties
remained in Canada; (6) she maintained her provincial health care
policy; and (7) her intentions to stay in Chile were not clear
(i.e., unfinished Canadian degree, fianc remaining in Canada, not
learning the native language, and not integrating into Chilean
society). As a deemed full-time resident of Canada, Jennifer would
be taxed on her worldwide income throughout each year. However,
there are no facts supporting this residency status as she did not
sojourn in Canada for more
34
Introduction to Federal Income Taxation in Canada:
Fundamentals
than 182 days in either of her two years spent in Chile.
Solutions to Chapter 2 Assignment Problems
35
As a part-year resident of Canada, Jennifer would be taxed on
her worldwide income for the portion of the year that she was
considered a full-time resident. However, a clean break must be
established for Jennifer to be given part-year status. The facts
supporting a clean break include: (1) she cancelled her student
club memberships and abdicated her position as chair; (2) her sole
source of income was from a Chilean source; (3) she moved most of
her personal and household belongings to Chile; (4) her contract
contained the option to extend her position for more than two
years; and (5) she cancelled her Canadian chequing account and her
Canadian Visa card. As a non-resident of Canada, Jennifer would be
taxed only on her Canadian-source income. Since Jennifers income
for the two years will be from Chilean sources, she would not be
liable for Canadian tax. The facts that support non-resident status
are the same as the ones supporting her clean break for part-year
residency. If it is concluded that she made a clean break at a
point in time, then she will be considered to be a non-resident
after that time. Conclusion In all probability, the courts would
rule that Jennifer is a full-time resident of Canada. The reasoning
behind this decision is two-fold: she did not sever all her ties to
Canada, nor did she attempt to integrate into Chilean society. The
facts supporting this conclusion may outweigh the facts supporting
her intentions to make Chile her permanent residence. Consequently,
she will be taxed on the income she earned in Chile during her
two-year stay. However, as a result of international tax treaties,
Jennifer will most likely be eligible for a foreign tax credit for
the amount of tax she has had to pay to the Chilean government and
her Canadian taxes payable will be reduced by the amount of the
credit. An actual case, with facts much like those in the above
case in which the Court came to a similar decision, is Glow v. The
Queen, 92 DTC 6467 (F.C.T.D.).