7 August 1990 Income Tax Severed Letter - Taxation of residents, non-residents and dual 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.

Dear Sirs:

Re: Non-Resident Withholding Tax

This is in reply to your letter dated February 12, 1990.

When a request for an opinion is made on behalf of a specific taxpayer in respect of a specific matter and in any case in order to obtain an opinion that is binding upon the Department, the request must be made in accordance with Information Circular 70-6R respecting Advance Income Tax Rulings, a copy of which is enclosed herewith. Your letter of February 12, 1990 does not comply with Information Circular 70-6R and does not include sufficient factual detail to permit us to provide a binding ruling. However, we can offer the following general comments which hopefully will be of assistance to you.

Taxation of Residents of Canada

Canada taxes its residents on their world-wide income from all sources and generally taxes non-residents on their income from sources in (but not outside) Canada.

It is essentially a question of fact as to whether a person is a resident of Canada at any particular time.

However, paragraph 250(1)(a) of the Income Tax Act (Canada) (the "Act") deems an individual to be resident in Canada throughout a taxation year if he or she sojourned in Canada in the year for a period of, or periods the aggregate of which is, 183 days or more.

An individual who is a resident of Canada for purposes of the Act must file an annual income tax return with Revenue Canada Taxation reporting the individual's world-wide income from all sources.

Taxation of Dual Residents

Under the Act it is possible for an individual to be a resident of both Canada and the United States and for purposes of the Act such a person is generally treated as a resident of Canada and must file an annual income tax return with Revenue Canada, Taxation reporting world-wide income from all sources. However, such an individual may be entitled to relief from Canadian tax by virtue of the Canada _ United States Income Tax Convention, 1980 (the "Treaty"), if the individual is determined to be a resident of the United States for purposes of the Treaty.

For purposes of the Treaty an individual will be determined to be a resident of one or the other or neither of Canada or the United States, but not both. Article IV of the Treaty, a copy of which Article is enclosed herewith, sets forth the rules for determining residency for purposes of the Treaty. We particularly refer you to paragraph 2 of Article IV, the so-called "tie-breaker rules".

We do not have sufficient information to permit us to express an opinion as to the residence of your client for purposes of the Act or the Treaty.

Generally, in the case of an individual who is resident of Canada for purposes of the Act, for example because of having sojourned in Canada for 183 days or more in the year, but a resident of the United States for purposes of the Treaty, the individual will be entitled to deductions in determining his taxable income under the Act equal to the sum of his or her income from sources outside of Canada. The individual will also be entitled to all applicable deductions available to residents of Canada in the determination of income, taxable income and tax payable in respect of Canadian source income. In the case of such an individual whose only Canadian source of income is interest on bank deposits at a bank in Canada, if under the Act the Canadian tax on such interest is determined to be greater than 15% of the gross amount of such interest, the Canadian tax will be reduced to equal 15% of the gross amount of the interest by virtue of Article XI of the Treaty.

Taxation of Non-Residents

Generally, individuals who are non-residents of Canada for purposes of the Act are subject to Canadian tax of 25% of the gross amount of interest paid or credited or deemed to be paid or credited to them by a resident of Canada. However, the rate of Canadian tax may be reduced pursuant to agreements for the avoidance of double taxation entered into by Canada with other countries, such as the Treaty.

Generally, assuming that an individual is determined to be a non-resident of Canada for purposes of the Act and a resident of the United States under and for purpose of the Treaty and that the only income of the individual from a Canadian source is interest on Canadian dollar bank deposits at a bank in Canada, the individual would be subject to Canadian tax of 15% (reduced from 25% by virtue of the Treaty) of the gross amount of interest paid or credited or deemed by the Act to be paid or credited to him on such Canadian bank deposits and would not be entitled to any deductions or exemptions whatsoever in determining such Canadian tax liability. In particular, the individual would receive no recognition in Canada for taxes payable in the United States. The individual may be entitled to relief from United States tax liability in recognition of Canadian taxes paid. However, this is of course a matter of the tax laws of the United States as to which we are not in a position to comment.

As indicated above, the opinions expressed herein are not advance income tax rulings and in accordance with paragraph 24 of Information Circular 70-6R are not considered binding on the Department.