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Canadian Tax Residency: An Expatriate Tax Horror Story

CompassGUIDES - November 2006

By Diana Matwichuk, Assignment Planning Specialist

Canadian tax residency is a very grey area, and therefore a big concern for assignees departing Canada. The stakes are potentially high. Since deemed residents of Canada must report, and are taxable on, their worldwide income, it is important that the matter not be dealt with lightly.

In a recent ruling on an appeal before the Canada Revenue Agency (“CRA”), a Canadian expatriate was deemed responsible for 5 years of retroactive tax on a salary that he had assumed would be tax-exempt because he had moved to the Bahamas. If this were to happen to an assignee earning $250,000 per year, the price tag would amount to tax on $1.25 million of accumulated income over a 5-year period – approximately $400,000!!

This case highlights that a review of Canadian tax residency should be included in assignment tax programs for all assignees departing Canada on long term assignment. The objective is to achieve a smooth transition to the international location, free of nasty surprises from the CRA.

Canadian Tax Residency

Determination of Canadian tax residency is based on a question of fact, and residential ties to both Canada and the host country are considered. The extent to which residential ties must be “switched” from Canada to the host country in order to be considered non-resident is seemingly somewhat at the whim of the CRA. Assessing Canadian tax residency and predicting how the CRA would view a case is an art rather than science!

Hauser v The Queen

In the recent case of Hauser versus the Queen, an appeal was made against income tax assessments by the CRA for the years 1997 - 2001. Mr. Hauser, an airline pilot, claimed to be a resident of the Bahamas during that period, whereas the CRA deemed him to be a tax resident of Canada during the same period and therefore owing tax on his income for those years.

The Best of Intentions

Mr. Hauser seemed to be taking all of the necessary steps in 1997 to establish himself as a resident of the Bahamas and a non-resident of Canada. He and his wife terminated the lease on their rented apartment in Ontario, applied for a permit to reside in the Bahamas, rented a furnished townhouse in the Bahamas, shipped their boat to Florida and sailed it to Freeport, and shipped their car to the Bahamas where it was then registered and insured. Mr. Hauser also opened a bank account in the Bahamas, and shipped household goods including clothing, stereo and sporting equipment to the Bahamas.

At first glance it would appear from these steps that the Hausers were happily settled in the Caribbean as residents of the Bahamas.

However …

The real story is always in the fine print. Mr. Hauser’s flying hub was Pearson International Airport in Toronto, and was required by his employer to be in Toronto 24 hrs prior to any scheduled flight, and within 2 hrs of Pearson while on reserve. While it is not uncommon for airline pilots to live in a city other than their flying hub, these working requirements brought Mr. Hauser into the country for more days than he was actually flying, and per the CRA, it was therefore a debatable point as to whether these should be considered business or personal days for the purposes of determining tax residency.

Further, Mrs. Hauser returned to Canada for extended periods during each year to escape the hurri cane season, often residing with her mother, whose apartment was also used as a mailing address for important letters and various applications. Apparently the Bahamian mail system is not reliable and this was considered a preferred option since it was easy to pick up the mail whenever Mr. Hauser was flying out of Toronto. Mr. Hauser usually stayed at his mother-in-law’s apartment prior to flying out of Toronto, and he kept seasonal clothing and a pilot's uniform there for convenience. The Hausers also spent the Christmas holidays in Canada each year.

As for the Bahamian bank account, it did not meet the Hausers’ expectations, as the chequing fees were found to be too high, and while the account was maintained, it was not used. Instead, the Hausers gravitated to regularly using a Canadian joint bank account, and Mr. Hauser’s paycheques were deposited into this account.

The Decision

The CRA weighed all of these facts, and determined that while Mr. Hauser had established residence in the Bahamas, he had not ceased to reside in Canada, implying that a person can live in more than one place at the same time. Unfortunately, Mr. Hauser had chosen as his new place of residence the Bahamas, which does not have a Tax Treaty with Canada, and as a result it was not possible to apply what are referred to as “tie-breaker” rules in the decision.

Summary

The lesson to be learned from this unfortunate story is that Canadian tax non-residency should be carefully planned for on long-term international assignments, in order to be able to pass possible scrutiny by the CRA, and to relieve the assignee of the burden of having to investigate the matter on his/her own (or, more likely, company) time. At CompassGUIDES, we ensure that companies includes tax residency reviews as part of their detailed assignment planning, and CompassTAX provides such reviews in the individual tax counseling sessions for assignees departing Canada.

About Us

At CompassTAX ™ , we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.

In concert with this strategic assignment tax planning, at CompassGUIDES ™ we assist multi-national employers with their preparation and provision of assignment documentation, including the possibility of offering these guides online to employees anywhere in the world with internet access. Visit our International Assignment Planning Help Desk for more information about international assignment planning.

The author wishes to thank Peter Simpson, CA of CompassTAX (403-531-2000) for his contributions to this article.

 


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compasstax.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compassguides.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6