Midterm 1 - Residence

Question 1

Residence: Residents

What are the locations of sources of income that RESIDENTS are taxed on?

Answer 1

Residents are taxed on WORLDWIDE income (EXCEPT for individual residents, who are only RESIDENT for part of the year; taxed as non-resident when away)

Question 2

Residence: Residents

How does the legislation deal with potential for double-taxation on residents?

Answer 2

Residents can be double-taxed on foreign income; dealt with by a) tax treaties, b) some ITA provisions allowing certain deductions

Question 3

Residence: Residents

Briefly explain - how can tax be avoided through foreign corporations or trusts?

Answer 3

Can establish residence or incorporate in tax haven (b/c Corp and trusts treated as separate taxpayer from individual under ITA) -> then grow investment there at lower tax rate, essentially allowing income splitting and tax deferral

Question 4

Residence: Residents

How does the ITA deal with tax avoidance on income earned outside Canada by having it ACCUMULATE in foreign corporation or trust?

Answer 4

ss 91-95 (“FAPI”) deals with avoidance of tax on income earned outside canada by having it ACCUMULATE (different form active earning) -> requires REPORTING of income earned and HELD in offshore corp or trust

Question 5

Residence: Residents

How else does the ITA deal with tax avoidance on investments (aka holdings) outside Canada?

Answer 5

ss 233.2-233.7 (in place after 1998) –> obligation to REPORT OWNERSHIP of holdings outside Canada worth > $100k

Question 6

Residence: NON-Residents

What base are non-residents taxed on?

Answer 6

Taxed on “taxable income EARNED IN CANADA” -> meaning a) employment income, b) business income, c) disposal of taxable Canadian property

Question 7

Residence: NON-Residents

What kinds of items do non-residents get taxed on?

Answer 7

a) employment income, b) business income, c) taxable Canadian property

Taxable Canadian Property (s.248(1)) includes - real property, capital property, shares in non-listed Canadian corp

Question 8

Residence: NON-Residents

What is the tax rate for non-residents? What is the policy rationale?

Answer 8

For income (except exclusions from “taxable canadian property”) - s. 116 PROGRESSIVE tax rate applies

Reason - competitiveness and capital import/export tax neutrality

Question 9

Residence: NON-Residents

Describe the Part XIII tax.

Answer 9

Part XIII covers exclusions from “taxable canadian property” -> primarily INVESTMENT income –> subject to flat 25% tax (s. 212) (but often reduced to 15% by treaties)

Question 10

Residence: NON-residents

How are Part XIII taxes collected?

Answer 10

Part XIII tax on non-residents’ investment income –> RESIDENT is required by s. 215 to DEDUCT AND WITHOLD the tax from payment to the non-resident (otherwise difficult to enforce)

Question 11

Residence: effect of tax treaties (intro)

What are 3 main purposes of tax treaties?

Answer 11

Tax treaties deal with:

1) Double taxation - eg tie-breaker rules
2) sharing of information for mutual enforcement
3) reduction of witholding taxes

Question 12

Residence: effect of tax treaties (intro)

Identify 3 potential reasons for double taxation

Answer 12

1) persons can be RESIDENT in more than one country
2) taxes are imposed on non-residents
3) some countries (eg US) tax on a DIFFERENT BASIS than residence (citizenship for US)

Question 13

Residence: effect of tax treaties (intro)

What is a primary way that tax treaties try to deal with double taxation?

Answer 13

Tax treaties address double tax by, among other things, having tie-breaker rules for where a person would be considered resident in both countries.

Question 14

Residence: Theory

What are five theoretical rationales for taxing residents on world-wide income and non-residents on source income?

Answer 14

1) ECONOMIC ALLEGIANCE Theory, 2) BENEFIT Theory, 3) ABILITY to Pay, 4) NEUTRALITY, 5) ENFORCEABILITY

Question 15

Residence: Theory

a) Briefly describe economic allegiance theory

Answer 15

Economic allegiance theory - tax cross-border transactions on basis that taxpayer has SUFFICIENT ECONOMIC CONNECTION to the country based on 1) value-added, 2) suppliers of capital, 3) consumers’ location

Question 16

Residence: Theory

b) Briefly describe benefit theory.

Answer 16

Benefit theory - those who BENEFIT from public services of a country should pay tax to cover the costs of those services

Question 17

Residence: Theory

c) Describe Ability to Pay

Answer 17

Ability to pay - THEORETICAL BASIS TO tax Canadian residents on worldwide income -> worldwide income = ability to pay -> contribution should match ability (Vertical equity)

Question 18

Residence: Theory

d) Describe Neutrality theory

Answer 18

• important factor in taxation of residents on world-wide income -> taxpayers should be taxed similarly on domestic income and foreign income –> don’t want to give preference to domestic or foreign source for income

Question 19

Residence: Theory

e) Describe Enforceability theory

Answer 19

residence - taxpayer that has connection (and assets) in Canada easier to enforce

Source - should get tax dollars before they leave country, otherwise hard to enforce

Question 20

Residence: Theory

ID four approaches to determining which persons should pay tax on income

Answer 20

Residence - most common
Citizenship - US only
Domicile - unclear in meaning
Source - tax based on where income earned

Question 21

Residence: Theory

Briefly describe Residence as a basis for taxation; explain the advantage and disadvantage of this approach

Answer 21

Residence - most common approach, practical enforcement, and mostly strong connection to country

BUT - possible taxation without representation

Question 22

Residence: Theory

Briefly describe Citizenship as a basis for taxation. Explain the advantage and disadvantage of the approach.

Answer 22

Citizenship - only used by the US, allows for easier enforcement overseas and justified by benefits of citizenship

BUT - sweeps many people with only tenuous connection + easy to double-tax

Question 23

Residence: Theory

Briefly describe Domicile as a basis for taxation. Explain the advantage and disadvantage of the approach.

Answer 23

Domicile is an unclear term subject to unclear court decisions; not commonly used (used mainly for estate taxes)

Question 24

Residence: Theory

Briefly describe Source as a basis for taxation. Explain the advantage and disadvantage of the approach.

Answer 24

Source - could tax based on where income from, would avoid double taxation if all countries did it, easy to enforce

BUT - hard to measure ability to pay, could lead to avoidance, disconnected from benefit from country

Question 25

Residence of INDIVIDUALS - Definition (mainly for final exam)

According to the Income Tax Folio on individual residency, how is an individual’s residence status determined?

Answer 25

Based on the THOMSON case
Determined by considering the degree that the person is connected to the place -> person is “ordinarily resident” in place where he normally or customarily lives.

Question 26

Residence of INDIVIDUALS - Definition (mainly for final exam)

What are the PRIMARY factors generally considered in determining individual residency?

Answer 26

Significant residential ties include - 1) dwelling place(es), 2) location of spouse or common-law partner, 3) dependants

Question 27

Residence of INDIVIDUALS - Definition (mainly for final exam)

What are some other factors considered in determining individual residence?

Answer 27

1) personal PROPERTY in Canada, 2) SOCIAL ties, 3) ECONOMIC ties, 4) INSURANCE coverage, 5) LICENSES, 6) MEMBERSHIPS, 7) passport

Question 28

Residence of INDIVIDUALS - Definition (mainly for final exam)

How are FOREIGN ties relevant in abandoning Canadian residency?

Answer 28

Ties to foreign jurisdiction are RELEVANT, but not determinative for abandoning Canadian residence b/c according to THOMSON, everyone is resident somewhere at all times.

Question 29

Residence of INDIVIDUALS - Definition (mainly for final exam)

Thomson v MNR, 1946 SCC - what are the key points of the majority decision?

Answer 29

1. For purposes of income tax, EVERY person is assumed to have a residence at ALL times & may have more than one
2. It is NOT necessary for residence to have a home, place or abode
3. Residence = where person spends his or her customary living
4. The taxpayer’s INTENTION is relevant, but NOT determinative

Question 30

Residence of INDIVIDUALS - Ordinarily Resident

How has “ordinarily resident” been interpreted?

Answer 30

“ordinarily resident” is mostly superfluous –> Thomson v MNR, 1946 SCC

The income Tax Folio also indicates you have to COMPLETELY sever ties to cut residence

Question 31

Residence of INDIVIDUALS - Sojourning

Contrast SOJOURNING with RESIDENCE, noting the tax effect of sojourning less than 183 days and 183 days or more

Answer 31

s. 250(1)(a) DEEMS a person to be RESIDENT in Canada if the person sojourns for 183 days or more -> taxed on WORLDWIDE income

Contrast is sojourn is a TEMPORARY stay - have to be physically resident + can’t apply to residents

Question 32

Residence of CORPORATIONS - Common Law Residence

What is the common law test of residence for a corporation? Cite the case.

Answer 32

DeBeers v Howe (HL) –> corporation is resident where the central management and control actually resides

Question 33

Residence of CORPORATIONS - common law residence

What factors influence the residence of the “central management and control” of a corporation? Is it a question of FACT or question of LAW? Cite a case

Answer 33

Unit Construction Co v Bullock (Eng CA) - central management and control is a question of FACT

DeBeers v Howe (HL) –> The location of meetings, residence of directors, and place of incorporation are key

Question 34

Residence of CORPORATIONS - Statutory Definition

ID the DEEMED RESIDENCE TEST for corporations under the ITA

Answer 34

ITA s. 250(4)(a) DEEMS that a corporation incorporated in Canada AFTER Apr 26, 1965 to be RESIDENT in Canada

For incorp BEFORE Apr 27, 1965 -> (4)(c) deems to be resident if RESIDENT IN Canada or CARRIED ON BUSINESS in Canada after

Question 35

Residence of TRUSTS - Summary

Is a trust an individual under the ITA? Cite the Provision. Is a trust a separate taxpayer? Cite the Provision)

Answer 35

s. 104(2) - Trust DEEMED as an individual
s. 248(1) - individual is a PERSON (other than a corporation)

Therefore, trusts are SEPARATE taxpayers under ss. 2 and 3

Question 36

Residence of TRUSTS - Summary

What is the COMMON LAW TEST of residence for a trust? Cite the case

Answer 36

GARON v the Queen, 2012 SCC 14 -> A trust resides where CENTRAL MANAGEMENT AND CONTROL actually takes place

Question 37

Change in Residence Status - Part-Time Residents

Describe the relief provided for those who are resident for only PART of the year. Cite the provision. Does it apply to corporations?

Answer 37

s. 114 ITA - relief for part-time INDIVIDUALS -> Individual will be taxed on WORLD-WIDE income only when RESIDENT

For remainder of time, taxed only on taxable income earned in Canada

Question 38

Change in Residence Status - Part-Time Residents

Contrast RESIDENCE for only part of a year with SOJOURNING in Canada for 183 days or more

Answer 38

Sojourning = TEMPORARY stay -> Sojourn > 183 days = DEEMED resident for WHOLE year (no relief)

Resident for PART of the year = only pay world-wide income WHEN RESIDENT (only taxable income earned in Canada for remainder)

Question 39

Change of Residence Status - Part-Time Residents

What is a critique of s. 114 and its interaction with s. 250(1)(a)?

Answer 39

S. 114 (part-time residence relief) and s. 250(1)(a) (sojourning rule) don’t interact well

Could lead to UNFAIR treatment of those who sojourn, compared with part-time residents

Question 40

Change of Residence Status - DEEMED Dispositions

Describe the departure tax and explain the reason for it. Cite the provision

Answer 40

s. 128.1 - Departure tax - is a DEEMED disposition of CAPITAL PROPERTY for those who give up Canadian residence –> purpose is to tax accumulated capital gains when person departs (b/c difficult to tax after they leave)

Question 41

Change of Residence Status - DEEMED Dispositions

List 3 specific exemptions excluded from deemed dispositions under s. 128.1

Answer 41

1) Real property in Canada, 2) Return to Canada within 60 months, 3) Taxpayer can POST ACCEPTABLE SECURITY to postpone payment of tax

Question 42

Tax Treaties - Deemed Non-resident

Why does s. 250(5) DEEM persons to be not resident where they are, pursuant to tax treaty, not resident?

Answer 42

s. 250(5) DEEMS persons who are non-resident by virtue of tax treaty to be NON-RESIDENT under the ITA to ensure they are subject to 1) the Part XIII WITHHOLD TAX and 2) deemed disposition tax

Question 43

PROVINCIAL Residence

Describe in general terms how the allocation of provincial tax is determined for individuals.

Answer 43

Individuals and Trusts fall under Reg 2601 - individuals are resident in the province they were in LAST DAY of the taxation year (2603 allocation where business income in multiple provinces)

Question 44

PROVINCIAL Residence

Describe in general terms how the allocation of provincial tax is determined for corporations.

Answer 44

Corporations - Reg 402 - where permanent establishment