Canada: Conrad Black: Resident Here, Resident There, Resident Everywhere?

Last Updated: March 25 2014
Article by Jim Wilson and Ingrid De Freitas

Most Read Contributor in Canada, October 2018

It is common for an individual to be resident in more than one country at a given time (i.e., to be a "dual resident"). Where an individual is resident in Canada as well as another jurisdiction, the final determination of the individual's residence status for purposes of the Income Tax Act (Canada) ("Act"), as a consequence of the possible application of subsection 250(5) of the Act, will generally require looking to the dual resident tie-breaker rules in Article 4 of Canada's tax treaties.1 In other words, where subsection 250(5) applies, which is in most cases involving dual resident persons, the application of the treaty's dual resident tie-breaker rules in favour of the other country will cause the individual to be deemed a non-resident of Canada. In a recent Tax Court of Canada decision, Conrad Black v. The Queen, 2014 TCC 12, the Court dealt with the interaction between Canada's tax treaty dual resident tie-breaker rules and domestic laws in a fact situation where subsection 250(5) did not apply. Even though the decision reached by the Court was, in the authors' view, well founded and of little surprise, the decision brings to light a possible trap for certain dual resident taxpayers as a consequence of the coming-into-force provision of subsection 250(5).

Summary of the Conrad Black Decision

The decision was in response to a motion for a determination of a question of law made by Mr. Black's counsel prior to the hearing. Almost all material questions of fact had been agreed upon by the parties. The question of law for determination was phrased as follows:

Whether, in view of the Canada-United Kingdom Income Tax Convention (1978) and the Canada-United Kingdom Income Tax Convention Act (1980) the Minister of National Revenue ("Minister") may assess tax against the applicant on the basis that he was a resident of Canada for purposes of the Income Tax Act on any of the items described in subparagraphs 5(i) to (vi) and subparagraph 5(viii) of the Amended Amended Notice of Appeal.2

In 2002, Conrad Black was a resident of Canada for purposes of the Act. He was also a resident of the U.K. in the same year. Pursuant to the dual resident tie-breaker rules of the Convention, Article 4(2) deemed Mr. Black to be a resident of the U.K. and not Canada for the purposes of the Convention. Both Mr. Black and the Canada Revenue Agency ("CRA") agreed that subsection 250(5) did not apply to his fact situation. The CRA sought to tax Mr. Black, as a Canadian resident, on his world-wide income including income derived from duties of offices and employments performed outside Canada. These amounts were not remitted or received in the U.K. and therefore were not subject to tax in the U.K. If not taxable in Canada, these items would not have been taxed in either jurisdiction (i.e., double non-taxation).

Two Articles of the Convention were important to this case. First, as alluded to above, the parties agreed that the tie-breaker rule in Article 4(2) deemed Mr. Black to be a resident of the U.K. and not Canada for purposes of the Convention. Second, Article 27(2) of the Convention was at issue. Article 27(2) is a treaty anti-avoidance rule intended, in part, to stop double non-taxation, and various versions of this rule are commonly seen in tax treaties in which one of the Contracting States (e.g., the U.K.) taxes its residents on a remittance-based system. This provision basically ensures that where a person (e.g., Mr. Black) is relieved from tax in Canada on certain income pursuant to a provision of the Convention, and that person is subject to tax in the U.K. only on the portion of that income that is remitted to or received in the U.K., the relief granted by Canada under the Convention will only extend to the amount remitted to or received in the U.K. Consequently, the two primary issues related to each of these Articles were as follows:

a) on the basis of subsection 30(2) of the Canada-U.K. Income Tax Convention Act 1980 ("Implementation Act"), which basically states that in the event of any inconsistency between the provisions of the Convention and the Act, the Convention prevails to the extent of the inconsistency, whether Article 4(2) of the Convention overrode the provisions of the Act which otherwise treated Mr. Black as a resident of Canada and thus prevented Canada from taxing Mr. Black on world-wide income; and

b) whether Article 27(2) of the Convention applied, thus enabling the CRA to assess Mr. Black because the amounts sought to be taxed were not remitted or received in the U.K.

Parties' Submissions

Counsel for Mr. Black argued that because he was deemed to be a resident of the U.K. under the Convention, he could not be a resident of Canada for purposes of the Act. Being a resident of both the U.K. and Canada would be a "clear inconsistency"3 as envisioned by the Implementation Act, in which case the Convention would prevail. As such, he was not a resident of Canada subject to tax under the Act on his world-wide income. Furthermore, counsel for Mr. Black asserted that Article 27(2) did not apply, given that no provision of the Convention applied to relieve Mr. Black from Canadian tax under the Act – the non-taxation of Mr. Black's income was pursuant to the Act itself. Counsel submitted that Article 27(2) applied only to limit the application of the provisions in the Convention relating to dividends, interest and royalties – that is, situations where non-residents of Canada would otherwise be subject to Canadian tax on Canadian-source income pursuant to the Act.

The CRA argued that under Article 4(2) Mr. Black was deemed a resident of the U.K. only for purposes of the Convention, and the dual resident tie-breaker rules in Article 4(2) did not affect his residency under the Act. Therefore, Mr. Black was a Canadian resident for purposes of the Act, and in the absence of a treaty provision denying Canada's right to tax, was subject to Part I tax on his world-wide income. Moreover, Article 27(2) overrode other provisions in the Convention that may have otherwise denied Canada the right to tax certain income, particularly non-Canadian source income, thus Canada maintained its full domestic right to tax income that was not remitted to or received in the U.K.

Reasons

The Court held that Mr. Black was a resident of Canada for purposes of the Act, was subject to tax under Part I on his world-wide income, and that Article 27(2) applied.

Chief Justice Rip began his analysis by noting that Article 4(2) defines "resident of a Contracting State" for purposes of the Convention. He applied a liberal and purposive approach to treaty and statutory construction, consistent with previous jurisprudence. Mr. Black's counsel had argued that there is an inconsistency between being a resident of Canada for purposes of the Act and a non-resident for purposes of the Convention, and therefore the Convention would prevail, requiring Mr. Black to be a non-resident for purposes of the Act. Chief Justice Rip considered that the meaning of the word "purposes" may assist in determining whether such a conflict existed. He looked at dictionary definitions of "purpose" and, in French, "sens," and concluded that the word "purposes" stresses a particular object, which in this case was the Convention itself.

He held that there was no inconsistency "between being a resident of Canada for the purposes of the Act and a resident of the U.K. for the purposes of the Convention".4 In Canadian case law, for two statutes to be inconsistent, it must be impossible to apply them both:

[29] I cannot find an inconsistency between the Convention and the Act in the language used and the intention of the drafters of the Convention, the Convention Act. The provisions of the Convention and the Act can work side by side without conflict or contradiction. For example, it is clear that if an income or capital item is not provided for in the Convention, Canada's authority to tax that item is not restricted by the Convention.

[30] In Friends of the Oldman River Society ([1992] 1 S.C.R. 3) the Supreme Court held that for two statutes to be inconsistent they must either be so contradictory that following one law would require breaching the other or the two laws must be unable to stand together ...

There was nothing in the Convention preventing Mr. Black from being taxed on the amounts at issue. Furthermore, the Commentaries to the OECD Model Tax Convention fully support that the dual resident tie-breaker rules do not override domestic residence tax status. Chief Justice Rip stressed that the dual resident tie-breaker rules are about "giving one state's claim to tax priority or precedence over the other".5 This interpretation was consistent with one of the objectives of tax treaties, that is, to allocate taxing power between the contracting states. If the application of the Act resulted in a contravention of the Convention, there would have been an inconsistency; however, as Chief Justice Rip held that there was no intention in the Convention to exempt Mr. Black's income in the circumstances, there was no contravention and therefore no inconsistency.

If Mr. Black had remitted his income to the U.K., he would have been subject to U.K. tax, and taxing him in Canada as well would have resulted in a contravention of the Convention. Chief Justice Rip stated that if that were the case, however, Mr. Black could have availed himself of Article 21 of the Convention (the Elimination of Double Taxation).6

As for Article 27(2), Chief Justice Rip held that "it was debatable"7 whether the respondent needed to resort to Article 27(2) given that he has ruled that Mr. Black was a Canadian resident for purposes of the Act and there was no inconsistency between the Act and the Convention. He therefore rejected Mr. Black's contention that Article 27(2) could not apply, which was based on the supposition that Mr. Black was not subject to tax under the Act, and therefore could not be relieved from tax under any provision of the Convention. Chief Justice Rip addressed the arguments of the parties nonetheless, determining that words such as "income arising in Canada" should not be read into Article 27(2) - Article 27(2) applied to any form of income.

General Comments

In the authors' opinion, focusing on the dual residence issue, Chief Justice Rip's decision and analysis regarding residence for the purposes of the Act versus the Convention, for the most part, was thorough and captured the spirit and object of the Convention and its intended interaction with the Act. As Chief Justice Rip pointed out in his analysis, there was an abundance of support in the Commentaries to the OECD Model Tax Convention, jurisprudence and excerpts from respected tax treaty experts that the definition of "resident of a Contracting State" in Article 4 does not override domestic tax laws. There is no inconsistency between a tax treaty and the Act where, for a dual resident taxpayer, Canada loses the tie-breaker under the treaty to the other Contracting State. Furthermore, the Convention is clear in that Article 4 defines "resident of a Contracting State" for purposes of the Convention only. One must only glance at the text in the distributive provisions of a tax treaty (i.e., in the case of the Convention, refer to Articles 6 through 20) to see that these provisions often can't even be read until it is established which Contracting State the otherwise dual resident will be considered a resident of for purposes of the treaty. The drafting of these Articles is generally premised on a person being a resident of one Contracting State who is receiving income from another Contracting State. Thus, when the tie-breaker rules in Article 4 of a tax treaty are applied and residence is awarded to one particular Contracting State, that determination is solely for purposes of the treaty. Canada would simply have to forfeit or reduce its right to tax on various sources of income based on the application of the distributive provisions in the treaty, but this would not affect factual Canadian residence under the Act. Inconsistencies between the Act and a Convention can arise out of contravening actions, such as if Canada tries to tax income that the treaty does not permit it to tax. Being resident of Canada under the Act is not a contravening action – it is simply a fact.

Even though Chief Justice Rip avoided making this a relevant factor in his decision,8 it is interesting to note that a decision by the Court to uphold Mr. Black's position would have rendered subsection 250(5) meaningless. There would be no need for this provision in the Act if treaty tie-breaker rules had the power to affect residence under the Act.

The Real Trap is Subsection 250(5) of the Act

The "interaction" issue between the treaty dual resident tie-breaker rules and residence status for purposes of the Act occasionally arises in situations where a taxpayer, or his advisor, has overlooked the ramifications of the coming-into-force provisions of subsection 250(5). Subsection 250(5) provides that: "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 purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada." On a plain reading of subsection 250(5) without reference to the limitations in the coming-into-force provision, a taxpayer might reasonably conclude that he or she will not be resident in Canada at any time while a tax treaty deems him resident of the other country. However, as a consequence of the coming-into-force provision, that conclusion will be incorrect if the taxpayer was resident in Canada for purposes of the Act on February 24, 1998 and was, under a treaty, resident in the other country as well. Thus, subsection 250(5) applies only to individuals resident in Canada who became, under a tax treaty, also resident in the other country after February 24, 1998.

Subsection 250(5) initially only applied to dual-resident corporations, but was amended in 1998 to include individuals and trusts. Ironically, these 1998 amendments were an attempt to prevent the use of certain dual-residency tax planning techniques in which an individual might simultaneously take advantage of being a resident of Canada for purposes of the Act while claiming the benefits of the treaty as a resident of the other country for purposes of the treaty, basically denying or limiting Canada's ability to tax world-wide income. However, since the 1998 amendments, taxpayers and their advisors often utilize tax strategies relying on subsection 250(5) to ensure that Canada will not assert world-wide income taxing rights on individuals who want to maintain some residential ties to Canada, but intend to also live abroad, often in a lower tax jurisdiction or a jurisdiction that does not tax on world-wide income. The interaction of the dual resident treaty tie-breaker rules and subsection 250(5) often serves as an advantage to taxpayers in that they can achieve tax certainty regarding their Canadian residence status by ensuring their ties in the other country will result in the tie-breaker rules giving preference to the other country (e.g. ensuring that the individual only has a permanent home available to him in the other country and not Canada).

As noted above, the coming-into-force provision for this 1998 amendment, as was later amended in 2001, grandfathered those individuals who were dual residents of both Canada and a treaty country on February 24, 1998. Consequently, such dual resident individuals would not be subject to any negative Canadian tax treatment, such as our departure taxes, as a result of being deemed a non-resident of Canada under subsection 250(5). However, if a taxpayer is not aware of this coming-into-force provision, which admittedly is easy to overlook, he might structure his residential ties in both countries thinking that the treaty tie-breaker rules will be settled in favour of the other country and, consequently, that he will be treated in Canada as a non-resident. That taxpayer may be in for a rude awakening if subsection 250(5) does not apply in his circumstances, and the treaty does not actually deny or reduce Canada's right to tax on certain sources of income, as may have been the case for Mr. Black.

Mr. Black has appealed the decision of the Tax Court to the Federal Court of Appeal.

Footnotes

1 The vast majority of Canada's tax treaties utilize the dual residence tie-breaker provisions found in Article 4 of the OECD Model Treaty which includes a series of tie-breaker rules (permanent home test, centre of vital interest test, habitual abode test, national/citizen test).

2 Para. 1.

3 Para 9.

4 Para 27

5 Para 33

6 Para 39 – Admittedly, the authors have struggled with this statement by Chief Justice Rip. The reference to Article 21 seems to be as a consequence of the fact that Article 20(A), the "Other Income Article", was not in force in 2002 and therefore Canada and the U.K. would have both maintained taxing rights under the distributive provisions of the Convention regarding certain income received by Mr. Black. Consequently, Article 21 would have applied and required the U.K. to provide foreign tax credit relief in respect of any Canadian taxes payable which would have avoided any double taxation. The confusion appears to be that for certain other income, such as the employment income earned by Mr. Black for employment duties exercised outside Canada (e.g. in the U.S.), Canada would have been denied its right to tax, in the absence of Article 27(2), under the distributive provisions (i.e. Article 15), and therefore no foreign tax credit relief would have been necessary.

7 Para 55 – Again, the authors struggled with this wording in that, in the absence of Article 27(2), Canada would have been denied its right to tax Mr. Black on certain income under the distributive provisions of the Convention. So even if Mr. Black was considered a resident of Canada for purposes of the Act, the application of Article 27(2) was still vital to the respondent's case with respect to some of the sources of income at issue. It is possible that Chief Justice Rip is using the word "debatable" simply because counsel for Mr. Black, in its arguments that Article 27(2) did not apply, had relied solely on the "residence" issue which had not been accepted by the Court.

8 Para 54

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Rotfleisch & Samulovitch P.C.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Rotfleisch & Samulovitch P.C.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions