13 May 2002 External T.I. 2002-0135585 - IFA 2002-Discussion of IT-221R3

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: Why did we revise IT-221R2?

Position: Several reasons, including removing the "2-year presumption", adding comments on subsection 250(5), and reporting our change in position on the "permanent home" test in the tax treaty residence tie-breaker rules.

Reasons: N/A

Question 1. Interpretation Bulletin IT-221R3

Interpretation Bulletin IT-221R3 dealing with determinations of individual residence status was issued on December 21, 2001. Please comment on why this interpretation bulletin was revised and what significant changes to the CCRA interpretative and administrative positions in the area of individual residence status determinations are reflected in the revisions. In particular, please comment on the apparent elimination of the "two-year presumption".

CCRA's Response

Interpretation Bulletin IT-221R3 reflects both recent amendments to the Income Tax Act and recent changes in the CCRA's administrative and interpretative positions on the issue of how individual residence status should be determined for Canadian income tax purposes.

The CCRA has wanted to eliminate the so-called "two-year presumption" for several years now, partly because of concerns about the potential for abuse of such a presumption, but also because the presumption has no basis in law and is, if anything, contrary to law. Generally, it has always been our position that every determination of residence status must be decided on its facts, which has been the position taken by Canadian courts throughout Canadian jurisprudence. In particular, Canadian courts that have reviewed how individual residence status should be determined for income tax purposes have either explicitly or implicitly stated that there is no particular time period required or necessary for being considered resident or not resident in Canada for income tax purposes. We note that even in IT-221R2, the predecessor to the present interpretation bulletin, the "two-year presumption" is set out in language that is meant to remind the reader that the facts of the case - specifically, the ties to Canada - are still ultimately what is important in determining an individual's residence status. However, we acknowledge that, administratively, the "two-year presumption" has been given a substantial amount of weight by the CCRA.

The conflict between our administrative practice and our interpretative position was one of the main reasons that our electronic residence determination system was changed in April 2001 to eliminate length of time inside or outside Canada as a significant factor for purposes of determining individual residence status. The electronic system is used by the CCRA to make all preliminary determinations of individual residence status, and is an important component of our administrative process. In many cases, no other evaluation of the individual's residence status is pursued either by the individual or by the CCRA, although further review is always possible and the result of the electronic residence status determination is not binding on the CCRA or the individual. Of course, where appropriate or where specifically requested by the individual, an employee of the CCRA will review an individual's residence status in more detail, and length of time inside or outside Canada may be taken into account as a factor at that stage.

The timing of the change to the electronic system and to the bulletin relates in part to the repeal of paragraph 250(1)(e) of the Act. Prior to its repeal, this provision deemed spouses of certain individuals (for example, diplomats, government employees, and members of the Canadian Forces), to be resident in Canada while they and their spouse were outside Canada. Following the repeal of paragraph 250(1)(e), the CCRA received a number of complaints from individuals who believed themselves to be residents of Canada for tax purposes who were being told by the CCRA that, with the repeal of the deeming rule, they could no longer be considered to be resident in Canada because of the length of their stay outside Canada. This conflicted with our interpretative position that in many - if not most - cases involving spouses of Canadian diplomats, government employees, and members of the Canadian Forces, the individuals continue to have significant ties to Canada while abroad, and are therefore ordinarily resident in Canada. Thus, paragraph 250(1)(e) should not have applied in most cases, and its repeal should not have affected how individual residence status was determined as much as it did. This strongly suggested to us that both the electronic residence determination system and the interpretation bulletin needed to be revised to better reflect the law regarding determining individual residence status and distinguishing between factual residence and deemed residence.

The revised interpretation bulletin sets out one other significant change in position on the part of the CCRA with respect to determining an individual's residence status. Our previous position was that in applying the "permanent home" test found in the "tie-breaker rules" in the residence article of our tax treaties, a house or apartment in Canada that was leased or sublet to a third party while an individual was outside Canada would be considered a "permanent home available" to the individual in Canada. Our new position is that as long as the house or apartment is leased or sublet to an unrelated third party on arm's-length terms and conditions, it will not be considered to be such a "permanent home available" to the individual in Canada. The new position was adopted as being more consistent with the approach taken in interpreting the term "permanent home available to him [or her]" for tax treaty purposes by the majority of Canada's tax treaty partners, and by the Organization for Economic Cooperation and Development (OECD).

The change in position regarding the "permanent home" test, along with the recent addition of individuals to the "deemed non-resident" rule in subsection 250(5) of the Act, was another reason that the interpretation bulletin was revised to eliminate the "two-year presumption". The CCRA anticipates that most Canadians leaving Canada for more than two years to work in a treaty country (and who have not severed their significant residential ties to Canada), will be deemed to be non-residents of Canada as a result of the interaction of the treaty "tie-breaker" rules and amended subsection 250(5). That is, we expect that in most cases where an individual is absent from Canada for an extended period of time, the individual will have a permanent home available to him or her in the treaty country but not in Canada, and as a result the individual will be resident in the treaty country for purposes of the treaty and subsection 250(5) will apply.

Presenter: Jim Wilson
Prepared by: Eliza Erskine
Phone number: 952-1361
Division: Income Tax Rulings Directorate

May 13, 2002