13 April 2011 External T.I. 2011-0391751E5 - Art. XXIX(2)(b) and Former U.S. Residents

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.

Principal Issues: a) As it applies to former long-term residents of the U.S. (i.e. former green card holders), which country has the right to tax income relating to services performed in the U.S.?
b) Which country should provide a foreign tax credit?

Position: a) Both countries will have the right to tax such income.
b) Canada will provide a foreign tax credit.

Reasons: a) The U.S. reserves the first right to tax former long-term residents on income arising in the U.S. pursuant to Article XXIX(2)(a)(i). Since the individual is also a resident of Canada, the taxpayer's worldwide income is also subject to tax in Canada.
b) Article XXIV does not apply in such instances as Article XXIV(3)(b) effectively deems the income to arise in Canada for the purposes of Article XXIV. This prevents Canada from being required to provide a tax credit under Article XXIV(2)(a)(i) as the income is not arising in the U.S. for the purposes of Article XXIV. The U.S. will not be required to provide any tax credit to be applied against U.S. taxes under Article XXIV(1) since this provision only applies to citizens and residents of the U.S. Article XXIV(1) does not specifically provide any relief to be granted to former long-term residents of the U.S. As the Internal Revenue Code does not appear to provide any other relief in such instances, Canada will have to provide a foreign tax credit pursuant to subsection 126(1) of the Act.

XXXXXXXXXX
				2011-039175
				Henry Leung
				613-957-9232
April 13, 2011

Dear XXXXXXXXXX :

Re: Subparagraph 2(b) of Article XXIX and Former Long-Term Residents of the U.S.

This is in response to your letter dated December 28, 2010 inquiring about the interpretation of subparagraph 2(b) of Article XXIX of the Canada-U.S. Treaty (the "Treaty"), as revised by the Fifth Protocol. Specifically, you asked which country would have the right to tax the income, as described in the hypothetical example set out below, and which country should allow for a foreign tax credit.

You asked us to consider the following hypothetical fact pattern:

• A taxpayer subject to the U.S. Internal Revenue Code §877 surrendered their U.S. green card and is considered a "former long-term resident" as defined in the Diplomatic Note to the Fifth Protocol of the Treaty.
• In the current year, the taxpayer is a resident of Canada under Canadian domestic law and would tie-break to Canada should the criteria in paragraph 2 of Article IV of the Treaty be applied.
• The taxpayer spent less than 183 days in the U.S. in any 12 month period beginning or ending in the year.
• The taxpayer's income relating to employment exercised on days spent in the U.S. during the year is not paid by or on behalf of a resident of the U.S. nor is it borne by a U.S. permanent establishment.
• The taxpayer spent less than 30 days in the U.S. in the year and is considered a non-resident for U.S. tax purposes.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Our Comments

Subparagraph 2(b) of Article XXIX of the Treaty, as it has been revised by the Fifth Protocol now states:

Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of the United States, may for a period of ten years following the loss of such status, be taxed in accordance with the laws of the United States with respect to income from sources within the United States (including income deemed under the domestic law of the United States to arise from such sources).

Based on this provision, a former resident of the United States who has income sourced from the U.S., may be liable to taxation in the U.S., even though based on the facts provided in the hypothetical example, the individual would otherwise be exempted from taxation in the U.S. based on subparagraph 2(b) of Article XV of the Treaty.

Subparagraph 3(a) of Article XXIX lists various sections of the Treaty which are not affected by the operation of subparagraph 2(b) of Article XXIX. Among the sections listed, Article XXIV is included. In particular, paragraph 3 of Article XXIV states:

3. For the purposes of this Article:

(a) profits, income or gains (other than gains to which paragraph 5 of Article XIII (Gains) applies) of a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) shall be deemed to arise in that other state; and
(b) profits, income or gains of a resident of a Contracting State which may not be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) or to which paragraph 5 of Article XIII (Gains) applies shall be deemed to arise in the first-mentioned State.

The effect of subparagraph 3(b) of Article XXIV is that where the individual who is resident of Canada, and would otherwise be exempt from U.S. tax on income from employment exercised in the United States under paragraph 2 of Article XV, will be deemed to have such income arise in Canada for the purposes of Article XXIV, since the U.S. cannot tax it without regard to subparagraph 2(b) of Article XXIX. Absent subparagraph 2(b) of Article XXIX, the United States would be denied the right to tax by virtue of paragraph 2 of Article XV in the hypothetical facts illustrated above. The taxpayer who is a resident of Canada, spent less than 183 days in the U.S. in any 12 month period beginning or ending in the year; and the taxpayer's employment income relating to days spent in the U.S. during the year is not paid by or on behalf of a resident of the U.S. nor is it borne by a U.S. permanent establishment.

Since subparagraph 3(b) of Article XXIV deems such income earned by the taxpayer to "arise" in Canada, and therefore sources the amount to Canada for the purposes of Article XXIV, Canada will not be required to provide a credit against Canadian taxes for U.S. taxes paid on the same income under clause 2(a)(i) of Article XXIV. Clause 2(a)(i) of Article XXIV specifically provides a credit for income tax paid to the U.S. on income arising in the U.S., which subparagraph 3(b) of Article XXIV has effectively reversed.

The U.S. will also not be required to provide any credit for Canadian taxes paid as paragraph 1 of Article XXIV only provides relief for a "citizen or resident" of the U.S. and paragraph 4 of Article XXIV only applies to U.S. "citizens resident in Canada". Subparagraph 2(b) of Article XXIX applies to former citizens or residents of the U.S. As such individuals are not current residents or citizens, it is unlikely that such individuals would qualify for a tax credit under paragraphs 1 or 4 of Article XXIV.

As relief is not available under the Treaty, the only other relief that may be available is by reference to the domestic laws of the U.S. and Canada. Canada will provide a foreign tax credit in respect of U.S. taxes paid on income from employment exercised in the United States pursuant to subsection 126(1) of the Act, as long as such U.S. tax paid is not reduced pursuant to provisions of the Internal Revenue Code which provide a tax credit for the Canadian taxes paid on the same income.

We trust these comments will be of assistance.

Yours truly,

Olli Laurikainen
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch