6 November 1992 Income Tax Severed Letter 9223325 - Deemed Resident in Receipt of Investment Income

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.

922332
24(1) K. B.
Harding
957-2111

Attention: 19(1)

November 6, 1992

Dear Sirs:
Re: Canada-U.S. Income Tax Convention ( the "Convention")

This is in reply to your letter of July 28, 1992 wherein you requested our opinion concerning Article XXII of the Convention in respect to the following hypothetical situation.

Mr. X was an employee of a U.S. company which transferred him to work for the Canadian branch for a period of 36 months. In order to avoid disruption of moving his family to Canada, Mr. X rented suitable accommodation for himself in Canada and made frequent return visits to his home in the United States.

You indicated that since Mr. X's family has not accompanied him and he is maintaining a residence in the United States, he continues to be a factual resident of the United States. You further state that he has not established sufficient residential ties with this country for him to be a factual resident of

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Canada, he will be deemed to be a resident of Canada since he lived temporarily in this country for a period or periods the aggregate of which is more than 183 days in the calendar year. Accordingly, Mr. X is deemed to be a resident of Canada pursuant to paragraph 250(1)(a) of the Income Tax Act (the "Act").

You are of the view that since Mr. X is a factual resident of United States for the purposes of Article IV of the Convention, that his investment income earned outside Canada will be exempt from Canadian tax by virtue of paragraph 1 of Article XXII of the Convention. Therefore in your view Mr. X would report his world income on his Canadian Income Tax Return but would be permitted to take a deduction pursuant to paragraph 110(1)(f) of the Act on line 256 of the T1 General Return.

In your letter you outlined what appears to be an actual fact situation related to completed transactions and events which have taken place. The review of such situations is the responsibility of the District Taxation Offices and it is generally our practice not to comment thereon. However, we are prepared to provide the following general comments which may be of assistance to you.

It is always a question of fact whether or not an individual is a factual resident of Canada for purposes of the Act in any particular situation. Since factual residency of Canada for purposes of the Act is determined under the rules of common law, it is related to ties which an individual establishes with this country. Accordingly, we cannot indicate whether or not an individual, in a situation similar to the one described above , is a factual resident of Canada without reviewing all the facts. Such individual can have his residency status determined by filling in Form NR74 and sending it to the International Taxation Office at the address printed on the form.

Where an individual is a resident of both Canada and the United States it is a question of fact whether or not the tie-breaker rule in paragraph 2 of Article IV of the Convention will be in favour of the United States or Canada. Consequently, without reviewing all of the facts of the particular case we cannot provide you with any assurance whether a particular individual in the above scenario will be considered a resident of the United States or Canada for purposes of the Convention.

Interest paid by a U.S. resident, for the purposes of the Convention, will be deemed to arise in the United States pursuant to paragraph 6 of Article XI of the Convention. On the assumption that an individual in receipt of such interest will be considered a resident of the United States in accordance with the rules set out in paragraph 2 of Article IV of the Convention, the interest will be considered to have been paid by one resident of

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the United States to another resident of the United States for the purposes of the Convention. Since Article XI of the Convention does not deal with such interest, paragraph 1 of Article XXII will apply to ensure the interest will only be taxed in the United States the country of residence. Similarly, interest arising in a third country would not fall within Article XI of the Convention and in accordance with paragraph 1 of Article XXII of the Convention will not be taxed in Canada.

Dividends paid by a company resident in the United States, for the purposes of the Convention, or a third country to an individual who is a resident of the United States, in accordance with the provisions of Article IV of the Convention, are not dealt with in Article X of the Convention. Consequently such dividends will fall within paragraph 1 of Article XXII and will be exempt from tax in Canada. Should an individual be resident of Canada for the purposes of the Act but resident of the United States for the purposes of the Convention such individual would be required to include such interest and dividends referred to above in income for purposes of the Act and he would be permitted a deduction in computing taxable income, under paragraph 110(1)(f) of the Act, on line 256 of the T1 General Return for amounts which are exempt from tax in Canada by virtue of the Convention.

In a situation where Canada has a tax treaty with a particular country which does not contain an "Other Income" article (e.g. Canada-Netherlands), it is our view that a deemed resident of Canada would be required to include in income any dividends and interest received from the other Contracting State or a third country in accordance with the Act. Since there is no "Other Income" article to exempt such income from tax in Canada, the deemed resident would not qualify for a deduction under paragraph 110(1)(f) of the Act. In such a case relief from double taxation may be provided by the provisions of the Act which allow for foreign tax credits and\or those allowing for deductions from income in respect of foreign income taxes paid.

We trust these comments are adequate for your purposes.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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