1 November 2001 External T.I. 2001-0073025 - Residency Status-Individuals Relocating

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Canadian residency status of individuals who leave Canada and relocate to another country that has remittance, territory or worldwide income based taxation systems.

Position: Question of fact

Reasons: Decision must be made on a case by case basis.

XXXXXXXXXX 	2001-007302
		Suzanie Chua
November 1, 2001

Dear XXXXXXXXXX:

Re: Canadian Residency Status of Individuals Who Leave Canada And Relocate to Other Countries

This is in reply to your letter requesting general information regarding the taxation of an individual who was resident in Canada prior to relocating to other countries. There are two situations you would like us to consider. First, where an individual relocates to one of the countries discussed below and severs ties in Canada in accordance with the criteria outlined in Interpretation Bulletin IT-221R2; and secondly, where an individual relocates to one of the countries discussed below that Canada has an income tax convention with, but maintains significant ties with Canada (e.g., keeps a home in Canada).

You have also asked us to comment on the type of documentation that would be required so that individuals living in the countries discussed below can be regarded as having established residency in those respective countries for purposes of applying the tie-breaker rules of the income tax convention between Canada and that other country. There are three systems of taxation in certain countries, namely, Japan, the UK, Hong Kong and Belgium that you would like us to comment on:

1. Remittance Basis

You have stated that in Japan, permanent residents are subject to income tax on worldwide income while non-permanent residents are taxed on Japanese source income and on foreign source income paid or remitted to Japan. You have also stated that in the UK, individuals who are resident and ordinarily resident in the UK but domiciled outside the UK are taxable on all employment income except income in respect of an employment with a non-resident employer, the duties of which are performed wholly outside the UK, unless these emoluments are remitted to the UK. These individuals are taxable only on UK source investment income and any investment income arising outside the UK is only taxable to the extent it is remitted to the UK. You have further stated that since the Canada-United Kingdom Income Tax Convention (the "UK Convention"), Article XXVII paragraph 2 denies treaty relief on income not remitted to the UK, it is implicit that the individual is nevertheless regarded as a resident of the UK and subject to the UK Convention even if they receive some income which is not taxed in the UK because it is not remitted. You have asked for our views on the residency status of individuals who are subject to tax on a remittance basis as residents of the UK and Japan.

2. Territory Basis

You have stated that in Hong Kong, the extent to which an individual is taxed is not governed by residence status. Instead, the individual earning income that arises from any source within Hong Kong, regardless of the residence of the individual, will be subject to Hong Kong tax. You have asked whether an individual who is subject to such a comprehensive tax liability can be regarded as a resident of that country.

3. Worldwide Income Basis

You have stated that in Belgium, the income tax code imposes tax on the worldwide income of individuals who are regarded as residents of Belgium and according to the Belgian code, residents of Belgium are individuals who are domiciled in Belgium or who manage their wealth from Belgium. Although it is stated in the tax code that the establishment of domicile is based on fact, it is also stated that unless proven to the contrary, there is an irrefutable presumption that an individual will have established his/her domicile in Belgium if that individual is registered in the communal population register. In the case of married people, there is an irrefutable presumption that the tax residence is located where the household is established. You have also stated that all individuals including expatriates who intend to live in Belgium must register in the communal register within two months of their arrival date and therefore, these individuals will have established their domicile upon registration and because they become regarded as Belgian residents for tax purposes, they are liable to Belgian tax on their worldwide income.

You have stated that certain foreign executives and researchers who are resident in Belgium for Belgian tax purposes may be exempted from paying tax on worldwide income. Although such individuals are residents of Belgium and would ordinarily be subject to tax on worldwide income, for the purposes of internal tax calculation, such individuals are not subject to tax on worldwide income but are given tax treatment similar to that of non-residents by administrative concession. You regard an individual who is liable to tax on worldwide income in Belgium as a Belgian resident despite the fact that under an administrative concession, that individual receives special tax treatment and is not subject to tax on worldwide income.

Comments

The situations outlined in your letter appear to involve actual proposed transactions and identifiable taxpayers and, therefore, should be the subject of an advance income tax ruling. Confirmation as to the income tax consequences of proposed transactions will only be given in the context of an advance income tax ruling. The procedures for making a request for an advance income tax ruling are outlined in Information Circular 70-6R4, dated January 29, 2001, issued by the Canada Customs and Revenue Agency (the "CCRA"). Additionally, the nature of documentation required to establish residency is an audit matter, which should be referred to International Tax Services Office. We can, however, offer the following general comments.

When an individual relocates to one of the countries discussed above and severs ties with or maintains significant ties in Canada, it is a question of fact whether the individual ceases to be a resident of Canada or remains a resident of Canada. The CCRA's position on the determination of an individual's residence status are outlined in Interpretation Bulletin IT-221R2, a revised version of which will be released in the near future. Subsection 250(5) of the Income Tax Act (the "Act") deems a person not to be resident in Canada if, at that time, the person who would otherwise be resident in Canada under the Act, "tie-breaks" under a tax treaty as a resident of a treaty country. With respect to your query on what documentation should exist to support an individual's claim of residency in the other country, each case is dealt with based on its own facts and such facts may or may not be supported by existing documentation; these facts can also be established or supported by some other method.

Pursuant to the principles stated in The Queen v. Crown Forest Industries Ltd. et al, the CCRA considers a person to be a resident of the other contracting state for the purposes of an income tax convention, if that person is liable to tax in that contracting state under the laws of that contracting state on worldwide income. On the facts of Crown Forest, the Supreme Court of Canada considered that the criteria for determining residence under

Article IV of the Canada-United States Income Tax Convention involved more than simply being liable to tax on some portion of liability (e.g., source liability) where there existed comprehensive taxation on worldwide income. As stated in Technical News No. 16, the determination of residency for the purposes of an income tax convention remains a question of fact, and each case is decided on its own facts.

In the context of the taxation systems that currently exist in Japan and the UK, as we understand it, a non-permanent resident is only subject to tax on remittance basis, i.e., the individual is liable to tax only on income derived from sources in the country concerned as well as on any foreign income to the extent that it is remitted to or received in either the UK or Japan. CCRA takes the view that individuals who are subject to UK or Japanese tax liability on remittance basis are liable to tax on worldwide income basis. As stated in Document No. 9822230, this is because if the foreign source income is ultimately remitted to or received in the individual's state of residence, tax liability will arise and the individual will effectively be taxed on all his or her worldwide income.

As stated in Document No. 1999-0014605, the CCRA's view is that Hong Kong is not covered by the Canada-China Income Tax Convention (the "Chinese Convention") as notwithstanding unification of Hong Kong and the People's Republic of China, Hong Kong has maintained its own tax system and the term "Chinese tax" as defined in the Chinese Convention does not include taxes imposed under Hong Kong's tax regime. However, we are prepared to make some general comments on countries that have territory based tax systems.

In our view, the principle in Crown Forest can apply equally to countries that have territory based tax systems and income tax conventions with Canada. If a country's most comprehensive taxation base is territorial and residents are not taxed on worldwide income, we would recognize a person's liability to income tax in that country as comprehensive if that territorial basis is the sole basis for taxation in that country. However, if that country taxed some foreign income received by residents of that country as well as territorial income, we do not consider an individual who is subject to tax only on income sourced in that country (i.e., territory basis) to be subject to the most comprehensive tax liability in that country.

As an example, we refer you to Document 2000-0045017 where we considered whether a particular individual could claim residency in the Dominican Republic under the Canada-Dominican Republic Income Tax Convention (the "Dominican Republic Convention") after the introduction by the Dominican Republic of a new tax code that altered the old code based on territorial concept, to a broader taxation system.

The CCRA's view was that the individual in question was taxable only on Dominican Republic source income, which was no longer the most comprehensive basis of taxation under the new code. Accordingly, in our view, the individual was not a resident of the Dominican Republic under the Dominican Republic Convention.

With respect to the residency of foreign executives and researchers who have relocated to Belgium, we are unable to comment fully on the limited facts you have provided. However, in our view, entitlement to exemption provisions embedded in domestic tax legislation does not generally preclude a person from being considered resident under a tax convention when the exemption system does not have limited application. In your example, you state that relief from Belgian tax is granted by Belgian tax authority's administrative concession for specific reasons so that only certain individuals are given tax treatment similar to non-residents. The tax exemption you described appears not to be an integral part of domestic Belgian law and it is a narrow exemption that applies only to particular taxpayers. Therefore, it would appear from your limited facts that these foreign executives and researchers are not subject to comprehensive tax liability in Belgium and therefore would not be considered resident in Belgium for purposes of the Canada-Belgium Income Tax Convention.

We trust these comments will be of assistance.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch