Residency Revisited 

Tax Forum

Residency Revisited

A possible appeal to the Supreme Court of Canada may change the way residency is defined.

FROM: JAN-FEB 2005 ISSUE | BY DON GOODISON

In the January-February 2004 issue, I wrote about the case of Pamela Allchin, a Canadian nurse who lost her appeal to the Tax Court of Canada regarding taxes she was assessed for a three-year period during which she was working in the United States. For reasons I outlined in detail in that article, the court held that she did not qualify for non-resident status.

Allchin appealed the decision to the Federal Court of Appeal on the grounds the Tax Court judge had erred in not considering the provisions of Article IV(2) of the Canada-United StatesTax Convention Act, 1984 "the treaty". The appeal, Pamela Allchin, Appellant v. Her Majesty the Queen, Respondent; [FCA 206], contended that Allchin had dual residency, and was not liable for taxes in both countries.

The Federal Court of Appeal, after considering factors not previously noted, stated in a unanimous decision that the Tax Court ruling should be set aside and the matter referred back to the court for redetermination. Allchin was awarded costs of $12,000. The decision is an important one because precedents set by the Federal Court of Appeal are critical in determining residency: should the Crown appeal this case to the Supreme Court of Canada, a favourable ruling for Allchin could change the way residency is defined.

To recap, the Tax Court judge deemed Allchin's ties to the United States to be insufficient to make her a non-resident of Canada, and held that she had to pay tax in Canada for the three years in question. But when the Federal Court of Appeal reviewed the case, several key points came to light that were not considered in the Tax Court's decision. For example, Allchin has held an active green card since 1967.

Another factor not noted in the Tax Court ruling is that green card holders are required to pay tax in the United States on their worldwide income, regardless of where they live. This fact played an important part in the Appeal Court's decision, as it meant that Allchin had been paying tax in the United States as if she were a resident of that country during the years under review.

Allchin's counsel argued that the test for Canadian residency, which was established by the Supreme Court of Canada in Thomson v. The Minister of National Revenue [(1945) 2 DTC 812 (SCC)], was not an appropriate gauge in determining U.S. residency, and that the Tax Court judge failed to recognize Allchin's dual residency. In the case of dual residency, the provisions of the treaty contain tiebreaker rules under Article IV(2), which states that when an individual is a resident of two contracting states, residency status shall be determined by the following factors:

In allowing Allchin's appeal, the Federal Court of Appeal found that the Tax Court ruling had failed to consider the possibility that Allchin might be a dual resident. Under the provisions of Article IV(1) of the treaty, Allchin's green card status means she fits the definition of a "Resident of a Contracting State."

In finding that Allchin was a resident of Canada, the Tax Court judge stated that he had determined she was not a resident of the United States. The Federal Court of Appeal held a different view and agreed with Allchin's lawyer that being a resident of Canada does not preclude a person from also being a resident of the United States. As detailed above, when a taxpayer is a resident of both countries, Article IV(2) of the treaty lists several tiebreaker rules. As with many tax matters, these rules are subject to interpretation. In that regard, the Federal Court of Appeal stated:

It is well established that a tax treaty is to be given a liberal interpretation with a view to implementing the true intention of the parties. Literal or legalistic interpretations which defeat its basic objectives are to be avoided (see J. N. Gladden Estates v. The Queen 1985 1 CTC 163 (F.C.T.D.) at 166-7, cited with approval by the Supreme Court of Canada in Crown Forest Industries Ltd. v. Canada 1995 2 S.C.R. 802 at paragraph 43). In Crown Forest Industries, the Supreme Court of Canada noted that the Treaty was intended to benefit Canadians working in the United States or vice versa, by protecting them from double taxation. An ancillary goal was also said to be the mitigation of administrative problems in having to file simultaneously tax returns in two uncoordinated tax systems.

I must confess that I am somewhat surprised at this decision. The Federal Court of Appeal has often taken on the role of "Captain Canada" and gone out of its way to deny appeals that would reduce the national coffers; to see a decision that favours a taxpayer is quite refreshing.

Determining residency has never been an easy task, as there are so many factors to consider. In Thomson, the court held that a person can be resident in several countries during the year, but didn't provide for the factor that a person can actually be a resident of more than one country at the same time. Even though evidence may establish that a person is a Canadian resident, they may be considered a resident of another country as well. In such cases of dual residency, Canadian tax practitioners must determine whether or not a treaty is in place with the other country, and if so, refer to the tiebreaking rules of the treaty to decide which country the person must pay taxes in. Try explaining that to a client!

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Don Goodison, CFP, FCGA, is a partner of Kemp Harvey Goodison, Certified General Accountants, in Burnaby, B.C. E-mail goodison@axionet.com.