12 June 1989 Internal T.I. 73829 F - Dual Residency under Canada-United States Income Tax Convention

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.

Subject:  Dual Residency Article IV Canada-United States Income Tax Convention (1980) (the "Convention")

This is in reply to your letter of April 10, 1989 in which you asked us two questions about dual residency under the Convention. The questions you have asked relate to a query you received from the Toronto District Office dated January 4, 1989 and your reply dated February 9, 1989.

We have reviewed the copy of your February 9, 1989 reply to the Toronto District Office and we note that you have taken the position that a Canadian incorporated company that elects to be treated as a Unites States resident under paragraph 1504(d) of the Internal Revenue code (the "Code") would be considered to be a resident of the united States for purposes of the Convention. We do not agree with your views on this issue. 

When dealing with a situation of this nature it is our view that you must first determine the effect of domestic law. After making this determination you then go to the convention to see if there is any relief available. In this case, where you have a Canadian incorporated company that has elected to be a resident in the United sates under paragraph 1504(d) of the Code, the effect of domestic law is that subsection 250(4) of the Income Tax Act (the "Act") would deem such a corporation to be a resident in Canada and therefore taxable on its world wide income in Canada. You would then go the the Convention to see if there is relief available.  Paragraph 1 of Article ("Article IV(1)") of the Convention would cause the Canadian for incorporated company to be considered a resident of the united States for the purposes of the Convention because the election under paragraph 1504(d) of the Code would come under the "any other criterion of a similar nature" requirement.  As you have a dual residency situation you would then go to paragraph 3 of Article IV ("Article IV(3)') of the Convention to determine residency. Article (3) of the convention of Canada not the Unites States for the proposes of the Convention because it was incorporated in Canada.  As a result there is no relief under the Convention from taxation in Canada.

In our opinion paragraph 2 Article XXIX ("Article XXIX(2)") of the Convention would not affect a residency determination under the Article IV(3) of the Convention.  Article XXXX(2) of the Convention, subject to paragraph 3 of Article XXIX of the Convention, permits the United States to a Tax Canadian incorporated company, that has elected to be taxed as a United States.  It does not preclude such a corporation from being considered a Canadian resident under Article IV(3) of the Convention.

In summary we are of the view that a Canadian incorporated company, that is deemed resident of Canada pursuant to subsection 250(4) of the Act (i.e., it was incorporated in Canada), will be considered to be resident only in a Canadian for the purposes of the Convention.  Consequently, even where otherwise such companies are dual residents, the question of whether such a company has a permanent establishment in Canada under Article VII of the Convention will never arise. Also, as such companies are residents of Canada for the purposes of the Act they are subject to the withholding tax provision in Part XIII of the Act and Fabi rules subdivision (i) of the Act.

We trust this will be of assistance to you.

for DirectorReorganization and Non-Resident DivisionSpecialty Rulings Directorate Legislative and IntergovernmentalAffairs Branch