14 March 2002 External T.I. 2001-0089595 - Interation of 250(5) & 128.1(4)(b)(iv)

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: In determining whether a taxpayer was resident in the 60-month period referred to in subparagraph 128.1(4)(b)(iv), whether subsection 250(5) would apply to a time prior to the effective date of that subsection?

Position: No.

Reasons: In view of the existence of a transitional rule in subsection 250(5), it is clear that the intention of Parliament was not to have subsection 250(5) applied retrospectively.

XXXXXXXXXX 2001-008959
S. Leung
March 14, 2002

Dear XXXXXXXXXX:

Re: Subsection 250(5) and subparagraph 128.1(4)(b)(iv) of the Income Tax Act ("Act")

We are writing in reply to your letter of June 18, 2001 in which you requested our view on the interaction of subparagraph 128.1(4)(b)(iv) and subsection 250(5) of the Act. In particular, you requested our view as to whether, in determining whether a taxpayer is resident for the 60-month period referred to in subparagraph 128.1(4)(b)(iv) of the Act in the hypothetical situation outlined below, subsection 250(5) of the Act would apply retrospectively to a time prior to the effective date of that subsection.

The hypothetical situation described in your letter is as follows:

Mr. X was originally a resident of Treatyland until August 31, 1991, when he moved to Canada. Mr. X maintained sufficient ties with Treatyland from September 1, 1991, to December 31, 1997, that Treatyland considered him to be resident in Treatyland for its domestic tax purposes. Mr. X also maintained sufficient ties with Canada for that same period of time that Canada considered him to be resident in Canada for the purposes of the Act. Under the residency tie-breaker rule of the Canada-Treatyland Income Tax Treaty, Mr. X was considered to be a resident of Treatyland from September 1, 1991, to December 31, 1997. On January 1, 1998, Mr. X severed all ties with Treatyland. Since that date he had been a resident of Canada until September 1, 2001 when Mr. X emigrated from Canada to Treatyland.

You specifically informed us that the above hypothetical situation was deliberately designed to ignore the potential application of the transitional rule of subsection 250(5) of the Act which is where a taxpayer was on February 24, 1998 a resident of Canada for the purpose of the Act and a resident of another country under the tax treaty that Canada has with that country, the rule of subsection 250(5) of the Act would not apply until the first time after that date at which the taxpayer becomes, under a tax treaty, resident in a country other than Canada. In other words, it is your view that the above-noted transitional rule of subsection 250(5) of the Act would not apply to the hypothetical situation described above.

It is also your view that in determining whether Mr. X was a resident of Canada for the period from September 1, 1991, to December 31, 1997, for the purpose of subparagraph 128.1(4)(b)(iv) of the Act in the hypothetical situation outlined above, subsection 250(5) of the Act would have application so that Mr. X would be deemed not to have been resident in Canada throughout that period of time and consequently the exception described in subparagraph 128.1(4)(b)(iv) of the Act would apply. You cited the Supreme Court case Gustavson Drilling (1964) Ltd. v. MNR (75 DTC 5451) as support to your interpretation. Subsequently, you submitted that your view is also supported by the Tax Court of Canada case James Hunter v. The Queen [2001]FTR 36700.¹ As a result of your interpretation, in applying subparagraph 128.1(4)(b)(iv) of the Act, the property that Mr. X owned at the time Mr. X last became resident in Canada (i.e., January 1, 1998) would not be subject to the deemed disposition rule since Mr. X was not resident in Canada for more than 60 months during the 120-month period that ended on September 1, 2001 when he emigrated from Canada to Treatyland.

Our Comments

We do not agree with your interpretation.

Subparagraph 128.1(4)(b)(iv) of the Act states:

"(b) the taxpayer is deemed to have disposed ... of each property owned by the taxpayer other than, if the taxpayer is an individual,

...

(iv) if the taxpayer is not a trust and was not, during the 120-month period that ends at the particular time, resident in Canada for more than 60 months, property that was owned by the taxpayer at the time the taxpayer last became resident in Canada or that was acquired by the taxpayer by inheritance or bequest after the taxpayer last became resident in Canada, and"

Subsection 250(5) of the Act which is generally effective after February 24, 1998 (except for the transitional rule mentioned above) states:

"Notwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with any country, resident in the other country and not resident in Canada."

It is your view, based particularly on Hunter described below, that since subsection 250(5) of the Act does not state "at a time after February 24, 1998", the time referred to in that subsection could refer to a time prior to February 25, 1998, even though that subsection is effective after that date. In other words, it is your view that, again based on Hunter, in applying subsection 250(5) of the Act for a taxation year that begins after February 24, 1998, the phrase "at a time" referred to in that subsection could be interpreted as a time before February 25, 1998, such that that subsection could apply to deem a taxpayer not to be resident in Canada before the effective date of that subsection if all the other conditions of that subsection are met. As mentioned above, you cited Gustavson and Hunter as support for your interpretation.

In Gustavson, the taxpayer, which is an oil company, incurred drilling and exploration expenses during the years 1949 to 1960 ("D&E Expenses"). Then, the taxpayer transferred substantially all of its property to its parent company in November 1960, and discontinued its business. In October 1964, the taxpayer resumed business after being taken over by another company following the liquidation of its parent company. In the years 1965 to 1968, the taxpayer sought to deduct the D&E Expenses which were subsequently disallowed by the Minister. The issue was whether section 83A(8a) of the former Act as amended by the repeal of paragraphs (c) and (d) in 1962 precluded the deduction of the D&E Expenses. It was conceded that, but for such repeal, the D&E Expenses would have been deductible under section 83A(1) and (3) of the former Act.

The history of the legislation with respect to the issue in Gustavson is that since 1949, Parliament has encouraged the exploration for petroleum and natural gas by permitting corporations whose principal business is production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas (hereinafter referred as "oil company") to deduct their drilling and exploration expenses in computing income for the purposes of the former Act. In 1956 the right was extended to successor corporations by legislation which provided that an oil company (successor corporation) which acquired all or substantially all of the property of another oil company (predecessor corporation) could deduct drilling and exploration expenses incurred by the predecessor corporation and the predecessor corporation was prohibited to claim such a deduction. However, the 1956 legislation contained certain qualifications. In order to entitle the successor corporation to the deduction it was imperative that the acquisition of the property of the predecessor by the successor be (a) in exchange for shares of the capital stock of the successor (section 83A(8a)(c) of the former Act) or (b) subsequent to the purchase of shares of the predecessor by the successor in consideration of shares of the successor, as a result of the distribution of such property to the successor upon the winding-up of the predecessor (section 83A(8a)(d) of the former Act). Since neither of these conditions was met when the taxpayer transferred substantially all of its property to its parent company in November 1960, the taxpayer was not considered to be a predecessor corporation and was still entitled to deduct the D&E Expenses after such a transfer of property. In 1962, the above two qualifications in section 83A(8a)(c) and (d) were removed. Thereafter, the legislation simply provided that every oil company, which at any time after 1954 acquired all or substantially all of the property of another oil company, could claim a deduction in respect of drilling and exploration expenses incurred by the predecessor corporation and the predecessor corporation was denied the right to make any such claim.

The Supreme Court of Canada ruled that the taxpayer was not allowed to deduct the D&E Expenses in the years 1965 to 1968 because it was considered a predecessor corporation for those years in question. The majority of the judges in that case stated that the repeal of paragraphs (c) and (d) of subsection 83A(8a) of the former Act did not have a retrospective effect. The Court stated:

"The general rule is that statutes are not to be construed as having retrospective operation unless such a construction is expressed or by necessary implication required by the language of the Act. An amending enactment may provide that it shall be deemed to have come into force on a date prior to its enactment or it may provide that it is to be operative with respect to transactions occurring prior to its enactment. In those instances the statute operates retrospectively. Superficially the present case may seem akin to the second instance but I think the true view to be that the repealing enactment in the present case, although undoubtedly affecting past transactions, does not operate retrospectively in the sense that it alters rights as of a past time. The section as amended by the repeal does not purport to deal with taxation years prior to the date of the amendment; it does not reach into the past and declare that the law or the rights of parties as of an earlier date shall be taken to be something other than they were as of that earlier date. The effect, so far as appellant is concerned, is to deny for the future a right to deduct enjoyed in the past but the right is not affected as of a time prior to enactment of the amending statute."

Then the Court continued to state:

"It is immaterial that the appellant company had a particular status as the result of previous legislation. Parliament, acting within its competence, has said that as of 1962 and for the purposes of calculating taxable income in future years, the appellant has a different status."

It should be noted that the statements made by the Supreme Court cited above contain no indication that the status of the appellant as a non-predecessor corporation prior to 1962 (i.e., the year of the repeal of paragraphs 83A(8a)(c) and (d) of the former Act) had changed. They merely indicated that as of the date of the repealing enactment, the status of the taxpayer had changed from a non-predecessor corporation to a predecessor corporation such that it could no longer be able to deduct in 1962 and subsequent taxation years the D&E Expenses incurred by it for the years from 1949 to 1960. In other words, the repeal of paragraphs 83A(8a)(c) and (d) of the former Act did not change the status of the taxpayer as a non-predecessor corporation for the years prior to 1962 although such repeal did affect the ability of the taxpayer to deduct the D&E Expenses incurred by it prior to 1962 (i.e., for 1962 and thereafter, the repeal has the effect of changing the status of the taxpayer from a non-predecessor corporation to a predecessor corporation). Therefore, in applying subsection 83A(8a) of the former Act after the repeal of paragraphs (c) and (d) thereof (i.e., for 1962 and subsequent years), the taxpayer was viewed as a predecessor corporation.

Applying the above statements of the Supreme Court of Canada in Gustavson to the hypothetical situation described in your letter, you opined that the amendment to subsection 250(5) of the Act in 1998 did not retrospectively change the status of Mr. X as a resident of Canada for the period from September 1, 1991, to December 1, 1997, so as to affect his rights and obligations of being a resident of Canada during that period of time. That is to say Mr. X does not need, for example, to re-file his income tax returns for those years and claim that he was not a resident of Canada in those years because of the retrospective effect of the application of subsection 250(5) of the Act. However, in 1998 and subsequent years after the amendment to subsection 250(5) of the Act has come into force, it is your view that Mr. X would, for the purposes of computing his income for the year 1998 and subsequent years, be considered a non-resident of Canada for the period from September 1, 1991, to December 1, 1997, as a result of the application of that subsection of the Act as amended.

The judgments in Hunter and in cases like Carey,² Scott³ and Girard⁴ all cited in Hunter appear to be consistent with the above-noted Supreme Court decision. These Tax Court of Canada cases all dealt with the issue whether a person is considered to be a former spouse of another person if the common-law relationship of these persons ended before the effective date of subsection 252(4) of the Act (subsection 252(4) is effective after 1992) when interpreting paragraph 60(b) of the Act at a time after 1992. The decisions of these Tax Court cases were all affirmative, concluding that in determining a person's status as a former spouse after the enactment of subsection 252(4) of the Act, that person would be considered to be a former spouse even though the conjugal relationship has ended prior to such enactment (i.e., at some time that person was not a spouse or a former spouse prior to such enactment). On the other hand, if one has to determine at a time prior to the effective date of subsection 252(4) of the Act the marital status of that person for the purposes of paragraph 60(b) of the Act, that person would not be considered to be a spouse or a former spouse at that time if that person would otherwise not be a spouse or former spouse under the law of that time. In other words, subsection 252(4) of the Act is not a retroactive legislation.⁵

Because of the above-noted court cases, it is your view that subsection 250(5) of the Act should be interpreted in such a way consistent with the decisions of those court cases such that in determining the residential status of an individual for the purpose of subparagraph 128.1(4)(b)(iv) of the Act for the purpose of computing the income of that individual after February 24, 1998, that individual would not be considered resident in Canada at a time before February 25, 1998 had subsection 250(5) of the Act applied at that time.

Your arguments, with the support of the various court cases referred to above, appear to be quite convincing on the surface. However, we feel that the interpretive approach to section 83A(8a) of the former Act and paragraph 60(b) of the Act in Gustavson, Hunter, Carey, Scott and Girard taken by the judges in those cases may not be relied upon for the interpretation of subsection 250(5) of the Act. First, the interpretation of subsection 252(4) of the Act adopted by the judges of those paragraph 60(b) cases is not without doubt. In Bromley,⁶ Judge Bell declined to follow the decision of Judge Bowie in Carey and concluded that the appellant was not a spouse or a former spouse. He said

"Subsection 252(4) applies only to taxation years after 1992. The amendment introducing that subsection cannot, therefore, be said to characterize a relationship as a common law relationship in which each of the Appellant and Custeau could be regarded as a spouse or former spouse, that relationship having existed prior to, and having ended in, 1988."

Even Judge Bowman in Hunter expressed his opinion that the language in subsection 252(4) of the Act was not as clear as he would like to see. He agreed with Judge Miller in Girard and lamented on the uncertainty of the legislation in this regard. He said

"I entirely agree with Bell and Miller JJ. that it is unfortunate that legislation should lead to such uncertainty and differences of opinion in members of this court. Indeed it is deplorable."

In our opinion, subsection 250(5) of the Act does not have retrospective effect on the residence status of a person at a time prior to the effective date of that subsection. That subsection only takes effect after February 24, 1998. That is, subject to the transitional rule contained in the coming into force legislation, when considering whether a person is a resident of Canada at a particular time after February 24, 1998, that person is deemed not to be a resident of Canada if he would otherwise be resident in Canada for the purposes of the Act but is, under a tax treaty that Canada has with another country, resident in that other country and not resident in Canada. It does not attempt to reach back to the time prior to the effective date of subsection 250(5) of the Act (i.e., prior to February 25, 1998) to change the residence status of any person at that time. The phrase "at a time" in subsection 250(5) of the Act means at a time after the effective date of that subsection. We do not feel it is necessary to add the words "after February 24, 1998" after the words "at a time" in subsection 250(5) of the Act to show that that subsection does not have retrospective effect. We feel that the effective date noted in the coming into force legislation is sufficient to denote the non-retrospectivity of that subsection.

You may note that our above reasoning is similar to the line of argument that has already been discussed in the Hunter case and was rejected by the Judge in that case. However, it should be noted that Judge Bowman said: "The refusal to give effect to the words "at any time" in subsection 252(4) essentially writes them out of the Act or amends them to read "at any time after 1992". Neither interpretation can be warranted by any principle of statutory interpretation of which I am aware. The interpretation that I believe is the better one appears to conform more to the scheme of the Act and the purpose of subsection 252(4)". (Emphasis added) In addition, we feel that the existence of a transitional rule in subsection 250(5) of the Act further supports the intention of Parliament and our argument. This transitional rule helps to indicate the intention of Parliament in amending subsection 250(5) of the Act and can thus distinguish itself from the provisions of the Act or former Act in those cases cited above. As mentioned above, the rule of subsection 250(5) of the Act would not apply for an individual, who on February 24, 1998, was resident in Canada for the purpose of the Act and at the same time resident in a treaty country for the purpose of the treaty between Canada and that country, until the first time after February 24, 1998, at which that individual becomes, under a tax treaty, resident in a country other than Canada. In light of this transitional rule, we perceive that the intention of Parliament was not to penalize certain taxpayers by changing the residence status of those taxpayers who on February 24, 1998, met all the conditions specified in subsection 250(5) of Act. In other words, it was intended that that subsection would have no application even after February 24, 1998, unless certain thing happens (i.e., unless those taxpayers become after February 24, 1998, a resident, under a tax treaty, of a country other than Canada). It would be odd to say then that for Mr. X, who was resident in Canada for the purpose of the Act in, say, 1997 and resident in Treatyland in the same year for the purpose of the treaty between Canada and Treatyland, subsection 250(5) would apply (even in the limited circumstances of subsection 128.1(4)) even though Mr. X has never become a resident, under a tax treaty, of a country other than Canada after February 24, 1998, and before September 1, 2001.

If instead of being a dual resident and a resident of Treatyland under the treaty for the period from September 1, 1991, to December 31, 1997, only, Mr. X maintained that status up to June 30, 2001, at which time he severed all ties with Treatyland, the transitional rule in subsection 250(5) of the Act would apply such that he would not be deemed to be a non-resident of Canada after February 24, 1998, until the first time after that date at which he becomes a resident, under a treaty, of a country other than Canada. After his emigration from Canada on September 1, 2001, if he maintained enough ties with Canada to be considered resident in Canada under the Act but resident in Treatyland under the treaty, subsection 250(5) of the Act would apply on September 1, 2001. It would seem absurd to say that that subsection also applies prior to June 30, 2001.

In summary, we are of the view that the interaction of subsection 250(5) and subparagraph 128.1(4)(b)(iv) of the Act can be distinguished from the court decisions discussed above. The transitional rule, in our opinion, indicates that the intention of Parliament is not to apply the subsection prior to February 25, 1998. As indicated in Hunter, since there is no principle of statutory interpretation that applies here, our interpretation seems consistent with the scheme of the Act and the purpose of subsection 250(5) and subparagraph 128.1(4)(b)(iv) of the Act.

For the above reason, we are of the opinion that in the hypothetical situation described above, Mr. X is considered to be a resident of Canada for the period from September 1, 1991, to September 1, 2001, (the date he emigrated from Canada to Treatyland) for the purposes of subparagraph 128.1(4)(b)(iv) of the Act.

As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, the opinion expressed in this letter is not a ruling and is consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

ENDNOTES

¹ James Hunter v. The Queen, [2001] CarwellNat 2076

² John Carey v. The Queen, 99 DTC 3502 (TCC); [1999] 2 C.T.C. 2677

³ James K. Scott v. The Queen, 2001 DTC 3747 (TCC); [2001] 4 C.T.C. 2132

⁴ Richard Edmond Girard v. The Queen, 2001 DTC 3759 (TCC); [2001] 4 C.T.C. 2025

⁵ For some discussion about the distinction between retroactive and retrospective legislations, please see the Hunter case.

⁶ Michael Bromley v. The Queen, 2001 DTC 3694 (TCC)

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