Citation: 2007TCC548
Date: 20070928
Docket: 2006-2458(IT)I
BETWEEN:
HERVE L. GARCIA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1] The appellant, a French citizen, is an
engineer. In 1993, he moved with his family to the United States on account of his employment. He obtained his green
card in the U.S. and, while there, moved three times
because of his employment, each time selling his house and purchasing another.
At the end of 2002, his employer sent him to Canada.
He accordingly sold his house in Los Angeles and purchased one in Canada. He
obtained a permit to work in Canada in December 2002, whereupon he moved here.
[2] At the same time, he did not want to lose
his green card; he thus asked for, and obtained, a re-entry permit from the U.S. authorities. This re-entry permit was issued on March
26, 2004, and was valid for a period of two years. It was not renewable.
[3] The appellant kept all his investment and
bank accounts in the U.S. He also used a post office box there. His
cars were all registered in the U.S. but were plated in Ontario for insurance purposes. When he left the United States, the appellant did not have American citizenship. As
he never returned to the U.S. after his move to Canada,
his re-entry permit expired and he never did acquire American citizenship.
[4] In 2002, the last year he worked in the
United States, he was employed by ActivCard and, according to his contract
(Exhibit A‑1, Tab 1), he was entitled to a maximum annual bonus
of 20% of base salary, calculated on the basis of overall company performance
and the attainment of his personal performance objectives. The amount of this
bonus was established in February or March of the following year.
[5] The company's year‑end was
December 31. The appellant received a bonus of $30,000 U.S. ($42,000
Cdn.) in 2003 in respect of his employment in 2002.
[6] The appellant filed his tax return for 2003
in Canada as a non-resident. He also filed a tax
return in the U.S. but took advantage of the foreign-earned-income exclusion
for wages and salaries of U.S. residents who are working abroad, which exclusion,
up to a maximum of $80,000, is provided for under U.S. domestic tax law. This,
combined with other U.S. tax credits, resulted in his not paying tax in the U.S. on his bonus.
[7] In Canada, he filed his tax return pursuant
to section 115 of the Income Tax Act (“ITA”). He included
the bonus in his income but deducted it as foreign-source income. The appellant
was reassessed as a resident of Canada and, pursuant to sections 3 and 5
of the ITA, the bonus was included as employment income received in 2003
while he was resident in Canada.
Residence
[8] It is not really disputed by the parties
that the appellant was ordinarily resident in Canada in 2003. Indeed, he had
sufficient ties with Canada (house, family, medicare protection, cars plated in
Ontario, Ontario driver’s licence, employment in Ontario, a bank account) to
establish that he was resident in Canada in 2003. It is also agreed that,
because of his green card, the appellant was a resident of the U.S. as well
(see Allchin v. R., 2004 CarswellNat 1535, [2004] 4 C.T.C. 1
(F.C.A.)).
[9] The appellant argued, however, that under Article IV
of the Canada‑U.S. Income Tax Convention (1980) (hereinafter the "Treaty")
he was a resident of the U.S. by virtue of the tie-breaker rule. He argued that
he did not have a permanent home available to him in Canada, as the
house here was purchased with the idea in mind that his stay in Canada would
only be temporary (2 or 3 years). Furthermore, he said that most of his
economic ties were with the U.S., as almost all of his investments were there.
[10] Article IV of the Treaty reads as follows:
(1) For the purposes of this Convention, the
term "resident" of a Contracting State means any person that, under
the laws of that State, is liable to tax therein by reason of that person’s
domicile, residence, citizenship, place of management, place of incorporation
or any other criterion of a similar nature . . . . For the purposes of this
paragraph, an individual who is not a resident of Canada under this paragraph
and who is a United States citizen or an alien admitted to the United States
for permanent residence (a "green card" holder) is a resident of the
United States only if the individual has a substantial presence, permanent home
or habitual abode in the United States, and that individual’s personal and
economic relations are closer to the United States than to any third State . .
. .
(2) Where by reason of the provisions of
paragraph 1 an individual is a resident of both Contracting States, then
his status shall be determined as follows:
(a) he shall be deemed to be a resident of the
Contracting State in which he has a permanent home available to him; if he has
a permanent home available to him in both States or in neither State, he shall
be deemed to be a resident of the Contracting State with which his personal
and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has
his centre of vital interests cannot be determined, he shall be deemed to be a
resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States
or in neither State, he shall be deemed to be a resident of the Contracting
State of which he is a citizen; and
(d) if he is a citizen of both States or of
neither of them, the competent authorities of the Contracting States shall
settle the question by mutual agreement.
[11] It is my opinion that under the tie-breaker
rule the appellant was resident in Canada since, during his stay in Canada, he
had a permanent home available to him here, while he had none in the U.S.
[12] In so deciding, I rely on the commentary by
the OECD (Organisation for Economic Co-operation and Development) Committee on
Fiscal Affairs on Article 4 (regarding the definition of resident) of the
Model Tax Convention on Income and on Capital, in Model Tax Convention on
Income and on Capital, condensed version, dated July 15, 2005, at page 80,
paragraphs 11, 12 and 13 (see Respondent’s Book of Authorities
Legislation, Tab B):
11. The Article gives preference to the Contracting State in which the
individual has a permanent home available to him. This criterion will
frequently be sufficient to solve the conflict, e.g. where the individual has a
permanent home in one Contracting State and has only made a stay of some length in the other Contracting State.
12. Subparagraph a) means, therefore, that in the
application of the Convention (that is, where there is a conflict between the
laws of the two States) it is considered that the residence is that place where
the individual owns or possesses a home; this home must be permanent, that is
to say, the individual must have arranged and retained it for his permanent use
as opposed to staying at a particular place under such conditions that it is
evident that the stay is intended to be of short duration.
13. As regards the concept of home, it should be observed that any
form of home may be taken into account (house or apartment belonging to or
rented by the individual, rented furnished room). But the permanence of the
home is essential; this means that the individual has arranged to have the
dwelling available to him at all times continuously, and not occasionally for
the purpose of a stay which, owing to the reasons for it, is necessarily of
short duration (travel for pleasure, business travel, educational travel,
attending a course at school, etc.).
[13] Also, in Interpretation Bulletin IT‑221R3,
at paragraph 26, there is the following:
"Tie-breaker rules" are found in paragraph 2 of
Article IV of most modern income tax treaties. Usually, these rules rely
first on a "permanent home" test to resolve the residence issue.
Generally, the "permanent home" test provides that an individual is
resident for purposes of the treaty in the country in which the individual has
a permanent home available to him or her. A "permanent home" (as that
term is used in income tax treaties) may be any kind of dwelling place that the
individual retains for his or her permanent (as opposed to occasional) use,
whether that dwelling place is rented or purchased or otherwise occupied on a
permanent basis.
[14] To this I would add the following academic
support:
Treaties typically deem a dual resident individual to reside in the
country in which he or she has a permanent home. Permanence implies that the
individual must have arranged and retained the home for his or her permanent,
as opposed to temporary, use or stays of short duration. A “home” includes any
form of residential establishment, for example, a house, apartment, or even rented
furnished rooms. It is the permanence of the home, rather than its size or
nature of ownership or tenancy, that is the measure of attachment to the
country.
[15] Finally, I would also note that this
interpretation of “permanent home available” is consistent with the use of
residence as the connecting factor for taxation, which is the method of choice
in Canada:
. . . The theory underlying the use of residence is that a person
should owe economic allegiance to the country with which he or she is currently
most closely connected in economic and social terms. Thus, the obligation to
pay tax on the basis of residence derives from the principle that persons who
benefit from their economic and social affiliation with a country have an
obligation to contribute to its public finances. Thus, an intention to
reside indefinitely in the country is not necessarily relevant to “residence”.
[Emphasis added.]
[16] With this reasoning in mind, I note that the
appellant owned a home in Canada, in which he and his family lived throughout
the 2003 taxation year. He did not own, rent or occupy any home, permanent or
otherwise, in the U.S. The appellant’s suggestion that Article IV mandates
a test of intention cannot in my view be sustained. Accordingly, I believe that
the appellant had a "permanent home available" to him only in Canada.
Applying the tie‑breaker rules of Article IV of the Treaty, I am of
the opinion that he should be deemed to be a Canadian resident.
Employment bonus
[17] The appellant’s next argument is that, even
if he was a resident of Canada in 2003, the bonus was derived from employment
held while he was resident in the U.S. According to his analysis of
Article XV of the treaty, the bonus was "remuneration derived by a
resident of [the U.S.] in respect of an employment". That being the case,
the bonus, he argued "[is] taxable only in [the U.S.] unless the
employment [was] exercised in [Canada]".
[18] The appellant relied on Hewitt v.
Minister of National Revenue, 1989 CarswellNat 361, [1989] 2 C.T.C. 2278.
[19] The Minister asserted that the bonus was
received by the appellant while he was resident in Canada and that the meaning
of the word "derived" in Article XV of the Treaty is the same as "received",
while the appellant maintained that it means "accrued" (Minister
of National Revenue v. Hollinger North Shore Exploration Co., 1963
CarswellNat 332, [1963] S.C.R. 131).
[20] As a Canadian resident in the 2003 taxation
year, the appellant is taxed on his worldwide income for that year under
subsection 2(1) of the ITA, which reads as follows:
An income tax shall be paid, as required by this Act, on the taxable
income for each taxation year of every person resident in Canada at any time in the year.
However, Article XV(1) of the Treaty provides:
Subject to the provisions of Articles XVIII (Pensions and
Annuities) and XIX (Government Service), salaries, wages and other similar
remuneration derived by a resident of a Contracting State in respect of an
employment shall be taxable only in that State unless the employment is
exercised in the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in
that other State.
[Emphasis added.]
[21] In 2003, the appellant was deemed to be a
Canadian resident under the Treaty. Therefore, paraphrasing for the purposes of
this appeal, if the appellant derived income from employment, it would be
taxable in Canada unless the services were performed in the U.S., in which case
it could be taxed there. If it was taxed in the U.S., it would still be taxable
in Canada, but a credit could be applied to offset some or all of the U.S. tax
paid.
[22] In Shultz v. R., 1996 CarswellNat
2795, 97 DTC 836, this Court held that the amount received was to be
included in income in the year of receipt; it considered for the purposes of
Article XV of the Treaty that the appellant in that case derived the
remuneration when he was a resident of Canada. That appellant had put forward
the argument that we must read Article XV as referring to the time at
which the income was earned. In the present case, the appellant submits that
the bonus was earned by, or accrued to, him while he was a resident of the U.S.
in 2002. In his view, because he was a resident of the U.S. at that time, the
bonus should be included only in his U.S. tax return, pursuant to Article XV.
[23] The appellant argues that understanding and
applying Article XV(1) depends upon the meaning of the word "derived".
He argues that it should be read as "accruing". He bases this argument
on the Supreme Court of Canada’s decision in Hollinger, supra,
and in particular at paragraph 12:
12 I share the view expressed by the learned trial judge that
the ordinary meaning of the words "derived from the operation of a mine"
is broader than that contended for by appellant, that the word "derived"
in this context is broader than "received" and is equivalent to "arising
or accruing" (vide C.I.R. v. Kirk, [1900] A.C. 588 at 592) and
that the expression is not limited to income arising or accruing from the
operation of a mine by a particular taxpayer.
[Emphasis added.]
[24] The appellant then suggests that "accruing"
should be understood in an accounting context, as in the "accrual basis of
accounting". He cites the following unreferenced definition:
Accrual basis (of accounting)
The method of recording transactions by which revenues and expenses
are reflected in the determination of results for the period in which they are
considered to have been earned and incurred, respectively, whether or not such
transactions have been settled finally by the receipt or payment of cash or its
equivalent. (Compare cash basis (of accounting).)
[25] He also cites Hewitt, supra,
arguing that it supports his reading of the word "derived". In his
view, in Hewitt, although the Court agreed that employment income is
taxable when received, that is so only if the employment itself is taxable in
Canada. At paragraph 8 of its decision the Court stated:
. . . These amounts, however, were not earned and did not accrue
when the appellant was resident in Canada. Indeed, they were derived
from a source which is exempt from income tax in Canada: the employment outside
Canada of a person not resident in Canada . . . .
[Emphasis added.]
[26] On the strength of this, the appellant
suggests that his bonus was derived from his employment in 2002, when he was a
non-resident, because his employer’s obligation to pay that bonus arose, for
accounting purposes, in 2002. Accordingly, he says, the fact that the bonus was
not received until 2003 does not change its non-taxable nature.
[27] I believe the appellant’s argument must
fail.
Meaning of "derived"
[28] The term "derived" is not defined
in the Treaty, which expressly provides in Article III(2) an approach to
understanding undefined terms:
As regards the application of the Convention by a Contracting State
any term not defined therein shall, unless the context otherwise requires and
subject to the provisions of Article XXVI (Mutual Agreement Procedure),
have the meaning which it has under the law of that State concerning the taxes
to which the Convention applies.
[29] In Canada,
section 3 of the Income Tax Conventions Interpretation Act, R.S.,
1985, c. I‑4, provides further direction in this regard:
Notwithstanding
the provisions of a convention or the Act giving the convention the force of
law in Canada, it is hereby declared that the law of Canada is that, to the
extent that a term in the convention is
(a) not
defined in the convention,
(b) not
fully defined in the convention, or
(c) to
be defined by reference to the laws of Canada,
that term has,
except to the extent that the context otherwise requires, the meaning it has
for the purposes of the Income Tax Act, as amended from time to time,
and not the meaning it had for the purposes of the Income Tax Act on the
date the convention was entered into or given the force of law in Canada if,
after that date, its meaning for the purposes of the Income Tax Act has
changed.
[30] In my view, the appellant’s
suggestion that, in the context of Article XV(1) of the Treaty, the word "derived"
should be interpreted as referring to the "accrual basis of accounting",
is not in line with the generally accepted approach to tax treaty
interpretation, namely, that tax treaties are to be interpreted liberally.
[31] The Federal Court
restated this principle in Gladden Estate v. R., 1985 CarswellNat 184, [1985] 1
C.T.C. 163 (F.C.T.D.), at
paragraph 14:
Contrary to an
ordinary taxing statute a tax treaty or convention must be given a liberal interpretation
with a view to implementing the true intentions of the parties. A literal or
legalistic interpretation must be avoided when the basic object of the treaty
might be defeated or frustrated in so far as the particular item under
consideration is concerned.
[32] First of all, the
Supreme Court of Canada expressly stated in Hollinger that in the
context of subsection 83(5) of the ITA, a provision
relating to income derived from the operation of a mine, "derived"
meant "arising or accruing". In my view, by specifying that this
meaning applied in that context, the Supreme Court was expressly limiting its
application to that particular subsection and to the particular circumstances
of that appeal.
[33] However, even if
the Supreme Court did intend its interpretation of the word "derived"
to have wide-reaching application, I still believe that the appellant’s
argument should fail because he is attempting to stretch the meaning of "accruing"
beyond what is reasonable. His argument suggests that we should interpret as a
technical accounting term, one which has specific legal consequences, a word
not defined in the Treaty. Such a suggestion runs completely contrary to the
general approach to treaty interpretation, which seeks to avoid assigning overly
literal or legalistic meanings to undefined terms.
[34] Perhaps most
importantly, I believe the appellant’s argument is flawed because it suggests
defining the word "derived" without regard for the context in which
it is found by focusing solely on the Supreme Court’s use of the word "accruing"
and completely ignoring the word "arising". In my view, in order to
understand the meaning that court assigned to "derived" in Hollinger,
"accruing" must be interpreted in the full context in which it
was used; specifically, it must be interpreted together with the word "arising".
[35] Let us consider,
then, the following dictionary definitions of "arise", "accrue"
and "derive":
arise
To originate;
to stem (from); to result (from); to emerge in one’s consciousness; to come to
one’s attention;
begin to
exist; originate; result; come to one’s notice; emerge; rise, esp. from a
seated position or from sleep.
accrue
To come to one
as a gain, an addition, or an increment; to increase, accumulate, or come about
as a result of growth;
To come into
existence as an enforceable claim or right; to arise; to accumulate
periodically;
come as a
natural increase or advantage, esp. financial; accumulate.
derive
To receive from a specified source or origin;
get, obtain,
or form; arise from, originate in, be descended or obtained from; gather or
deduce; trace the descent of (a person); show the origin of (a thing); show or
state the origin or formation of (a word etc.); obtain (a funtion) by differentiation.
[36] In my view, the
common thread in the definitions of these three terms is the idea of "source".
In fact, reading Hollinger as a whole, I believe the Supreme Court was
clearly defining "derived" with reference to the source of the income
rather than to the method of accounting for the income. The Supreme Court put
it this way at paragraphs 11‑13:
11 Shortly
stated, appellant’s position is (1) that the expression “income derived from
the operation of a mine” in Section 83(5) refers to income from a particular
source namely the operation of mine (2) that the operation of a mine being
a business, the income exempted from taxation is the profit from such business
received by the particular corporation claiming the exemption, and (3) that the
source to respondent of the income in issue here was merely the property right
for which royalty was payable and not the operation of a mine.
12 I
share the view expressed by the learned trial judge that the ordinary meaning
of the words “derived from the operation of a mine” is broader than that
contended for by appellant, that the word “derived” in this context is broader
than “received” and is equivalent to “arising or accruing” (vide C.I.R. v.
Kirk, [1900] A.C. 588 at 592) and that the expression is not limited
to income arising or accruing from the operation of a mine by a particular
taxpayer.
13 The
mine in question was operated as a unit by respondent and Iron Ore Company of
Canada as a joint venture for their joint benefit, and the ore in place
represented a capital investment of both companies. A return on that capital
investment could be realized only through the operation of the mine, and in the
circumstances here, in my opinion, such operation was the source of
respondent’s income within the meaning of Section 83(5), whether that
income came from the extraction and sale of its own ore or from the royalty
paid to it with respect to the reminder of the ore belonging to the Iron Ore
Company of Canada.
[Emphasis added.]
[37] Accordingly, I do
not believe that "derived" should be interpreted as referring to the "accrual
basis of accounting". Rather, I would suggest that it should be understood
to mean something akin to "having its source". If that is the case,
Article XV(1) should be read in such a way that, if the appellant had
income from an employment source, it would be taxable only in Canada, unless
the services were performed in the U.S., in which case it could also be taxed
there. Thus, the appellant’s suggestion that the bonus he received in 2003 was
non-taxable income that accrued in 2002 is without merit.
Tax treatment of the employment bonus
[38] The appellant argues
lastly that even if he is not right in his other arguments, the appropriate
authority in the present circumstances is nonetheless Hewitt. He argues
that on the strength of that case his bonus was not taxable because it related
to employment exercised before he became a resident of Canada.
[39] The respondent,
on the other hand, suggests that the appropriate authorities are Tedmon, Shultz, and Kuwalek,
and that the
employment bonus was taxable when it was received.
[40] In my view, the respondent’s
argument is to be preferred.
[41] I begin with subsection 5(1)
of the Act, which provides that employment income, including employment
bonuses, is taxable when received:
Subject to
this Part, a taxpayer’s income for a taxation year from an office or employment
is the salary, wages and other remuneration, including gratuities, received
by the taxpayer in the year.
[Emphasis added.]
[42] In Nowegijick, the Supreme Court of
Canada further explained the operation of subsection 5(1), stating at
paragraph 19 that:
. . . It
defines the taxpayer’s income from employment as the salary, wages and other
remuneration received. The liability is at the point of receipt. . . .
[Emphasis added.]
[43] The appellant
cites Hewitt, a case that involved a taxpayer who performed employment
services when he was a non-resident of Canada, but did not receive his salary
until after he became a resident. This Court based its decision on the fact
that the income, when earned, was not taxable in Canada. At paragraph 8
the Court states:
. . . These
amounts, however, were not earned and did not accrue when the appellant was
resident in Canada. Indeed, they were derived from a source which is exempt
from income tax in Canada: the employment outside Canada of a person not
resident in Canada. The fact that those amounts were received soon after the
appellant’s return to Canada and the resumption of his residence in Canada does
not disconnect those amounts with their tax exempt source (i.e.: the
appellant’s employment outside Canada when he did not reside in Canada). . . .
[44] While the Court’s
reasoning in Hewitt may have produced an equitable result in the
circumstances, in my view, it did not take into account either the statute or the
Supreme Court of Canada decision in Nowegijick. I believe the
appellant's salary from his employment should have been considered taxable
income in Canada. I would suggest that subsequent decisions, in particular
those cited by the respondent, endorse an approach that is more in line with
both the statute and Nowegijick.
[45] In Tedmon, the
taxpayer had been given stock options while he was a U.S. resident,
but he did not exercise the options until after he became a Canadian resident. Citing
subsection 5(1) of the Act and following Nowegijick, this Court
held that the income was taxable at the time it was received, not when the stock
options were granted. In coming to this decision, the Court also distinguished,
and arguably attempted to restrict the application of, Hewitt on the
basis that the taxpayer in Hewitt had already exercised all his rights
and entitlements to the income prior to becoming a resident of Canada (at
paragraphs 6 and 7):
6 The
appellant argues this does not apply to a Canadian resident taxpayer where the
agreement was entered into by him while he was a non-resident with a
non-resident employer and cites Henry Russell Hewitt v. Minister of National
Revenue, [1989] 2 C.T.C. 2278, 89 DTC 451, as the authority for
this proposition. In that case, Mogan, T.C.J., states at page 2279 (D.T.C. 452)
that the taxpayer, Hewitt, was not liable in respect to income which was not
earned or did not accrue when the appellant was a resident in Canada. In fact
that income accrued on May 25, 1984, while Mr. Hewitt was still in Libya when: "...
he signed all the documents connected with the amicable termination of his
employment by Oasis Oil and requested a single cash payment out…".
7 Thus,
Mr. Hewitt exercised all his rights and entitlement to income and receipt
thereof while a non-resident of Canada. He also directed where the cheque was
to go at that time.
[46] In Shultz, the
taxpayer received, after becoming a Canadian resident, a bonus adjustment in
connection with his previous employment in the U.S. In coming to a decision,
the Court considered both Tedmon and Hewitt. In the end, the
Court preferred the reasoning in Tedmon, which recognized that subsection 5(1)
of the Act and Nowegijick should be applied, and expressly
declined to lend its support to the reasoning in Hewitt (at
paragraphs 27 to 29):
27 Both
counsel referred the Court to the case of Tedmon v. Minister of National
Revenue (1991), 91 DTC 962 (T.C.C.). The Court held that the liability
for payment of tax under subsection 5(1) and paragraph 7(1)(a)
is at the point of receipt of the benefit. The Court relied on a statement to
that effect in Nowegijick v. R. (1983), 83 DTC 5041 (S.C.C.) at
page 5043. I accept this reasoning. Subsection 5(1) states that
income from employment is taxed in the year it is received. Section 2 does
not exclude sources of income outside of Canada. Subsection 3(a)
sets out how the income of a Canadian resident is determined. Section 3
includes income from employment which is the source of the bonus adjustment.
Section 5 defines the taxpayer's income from employment as salary, wages
and other remuneration which, in my opinion, includes the bonus adjustment at
issue.
28 In
the Nowegijick (supra) case the Supreme Court of Canada fixes the
liability under subsection 5(1) as at the point of receipt. The
Appellant received the payment while a resident of Canada. Section 6 states
that there be included in income from an office or employment benefits of any
kind. The bonus payment received by the Appellant was a benefit in respect of
his office or employment with Tenneco. The words "in respect of"
contained in section 6 are to be given the widest possible scope as stated in Nowegijick.
29 I
find nothing in sections 2, 3, 5 and 6 of the Act to permit the conclusion
that the bonus payment to the Appellant is not taxable because the source was
the Appellant's employment outside Canada at the time he was a non-resident of
Canada. While the decision in Hewitt may well be an equitable one it is
not supported by the legislation which I am bound to follow. The Appellant
clearly received an economic benefit that was connected to his employment. This
brings the bonus payment within the terms of paragraph 6(1)(a).
[47] Lastly and most
recently, in Kuwalek the taxpayer received an employment bonus after he
became a Canadian resident. There as well the Court appears to have considered
both Hewitt and Tedmon and to have once again preferred the reasoning
in Tedmon (at paragraph 9):
The source of
the Appellant's income as of October 2003 was his employment. While I
understand that the Appellant feels that it would be more sensible to tax
employment income in the year the work was done, that is not what the Act
provides. Pursuant to subsection 5(1) and paragraph 6(1)(a), employment
income is taxable in the taxation year in which it is received. The Appellant
does not dispute that he received the $15,000 bonus in 2004; accordingly, it
was properly included in the Appellant's employment income for that year.
[48] In my view, the
approach in Hewitt should not be followed. Rather, I conclude that an
employment bonus is taxable at the time of receipt, regardless of when or where
the employment to which it relates was exercised.
[49] In the end, the essential
point is this: employment income earned by a Canadian resident is taxable at
the time of receipt. Article XV assigns jurisdiction to tax that income to
Canada. If the employment was exercised in the U.S., the U.S. also has
jurisdiction to tax, should it choose to do so. If the income is taxed in both
states, in accordance with the agreement reflected in Article XXIV(2) and
by operation of section 126 of the ITA Canada provides a credit to
offset the tax paid in the U.S.
[50] Article XXIV(2)
reads as follows:
In the case of
Canada, subject to the provisions of paragraphs 4, 5 and 6, double taxation
shall be avoided as follows,
(a) subject to
the provisions of the law of Canada regarding the deduction from tax payable in
Canada of tax paid in a territory outside Canada and to any subsequent
modification of those provisions (which shall not affect the general principle
hereof)
(i) income tax
paid or accrued to the United States on profits, income or gains arising in the
United States, and
(ii) in the
case of an individual, any social security taxes paid to the United States
(other than taxes relating to unemployment insurance benefits) by the
individual on such profits, income or gains
shall be
deducted from any Canadian tax payable in respect of such profits, income or
gains . . ..
[51] The agreement reflected
in this Article is carried out in Canada through section 126 of the ITA,
the relevant portion of which reads as follows:
A taxpayer who
was resident in Canada at any time in a taxation year may deduct from the tax
for the year otherwise payable under this Part by the taxpayer an amount equal
to
(a)
such part of any non-business-income tax paid by the taxpayer for the year to
the government of a country other than Canada . . . as the taxpayer may claim,
not exceeding . . .
[52] Applying now that
conclusion to the facts of this case, Mr. Garcia, a resident of Canada,
received employment income in 2003 in respect of employment he exercised in the
U.S. Article XV of the Treaty provides that that income is to be taxed in
Canada in 2003, but that it may also be taxed in the U.S. Accordingly, he was
correctly taxed on that income in Canada and, if he had paid tax on it in the
U.S., he could have claimed a tax credit under section 126 of the ITA.
Conclusion
[53] The appellant is
both a Canadian and a U.S. resident. However, applying the tie‑breaker
rules in Article IV of the Treaty, I conclude that he is deemed to be a
Canadian resident by virtue of the fact that he has a permanent home available
to him in Canada, and not in the U.S.
[54] The appellant’s
bonus was derived from an employment source. Employment income is taxable when
received. As it was received when the appellant was a Canadian resident, I am
of the opinion that the employment bonus is taxable in Canada even though it
was derived from employment that he exercised in the U.S.
[55] The appeal is dismissed.
Signed at Ottawa, Canada, this 28th day of September 2007.
"Lucie Lamarre"
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