Tag Archives: tax treaty tie breaker

Part 2: OECD Common Reporting Standard (“CRS”): “tax residence” and the “tax treaty tiebreaker”

This is Part 2 – a continuation of the post about “tax residency under the Common Reporting Standard“.

That post ended with:

Breaking “tax residency” to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking “tax residency in Canada” can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a “tax resident of Canada”.)

Let’s assume that our “friend”, without considering possible “tax treaties” is or may be considered to be “ordinarily resident” in and therefore a “tax resident” of Canada.

Would a consideration of possible tax treaties (specifically the “tax treaty residency tiebreaker) make a difference?

This question will be considered in Part 2 – a separate post.

What is the “tax treaty residency tiebreaker”?

It is entirely possible for an individual to be a “tax resident” according to the laws of two (or more countries). This is a disastrous situation for any individual. Fortunately with the exception of “U.S. citizens” (who are always “tax residents of the United States no matter where they live), citizens of most other nations are able to avoid being “tax residents” of more than one country. This is accomplished through a “tax treaty tie breaker” provision. “Treaty tie breakers” are included in many tax treaties. (Q. Why are U.S. citizens always U.S. tax residents? A. U.S. treaties include what is called the “savings clause“).

Some thoughts on the “savings clause”

First, the “savings clause” ensures that the United States retains the right to impose full taxation on U.S. citizens living abroad (even those who are dual citizens and reside outside the United States in their country of second citizenship).

Second, the U.S. insistence on the “savings clause” ensures that other countries agree to allow the United States to impose U.S. taxation on their own citizen/residents who also happen to have U.S. citizenship (generally because of a U.S. place of birth.)

Where are “tax treaty tie breakers” found? What do they typically say?

Many countries have “tax treaty tie breaker” provisions in their tax treaties. The purpose is to assign tax residence to one country when a person is a “tax resident” of more than one country.

As explained by Wayne Bewick and Todd Trowbridge of Trowbridge Professional Corporation (writing in the context of Canadian tax treaties):

Continue reading

Determining Tax Residency in Canada: Deemed resident vs. factual resident

Let’s begin with the law as stated in the Income Tax Act of Canada …

Taxation in Canada is governed by the Income Tax Act of Canada. Sections 1 and 2 of the Act read in part as follows:

Short Title

1 This Act may be cited as the Income Tax Act.

PART I Income Tax

DIVISION A Liability for Tax

2 (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

(This does NOT say that ONLY those “resident in Canada” are required to pay Canadian tax. In fact there are circumstances under which nonresidents of Canada are also required to pay different kinds of Canadian tax.)

Searching for the meaning of “resident in Canada” …

Tax Residency” is becoming an increasingly important topic. Every country has its own rules for determining who is and who is not a “tax resident” of that country. The advent of the OCED CRS (“Common Reporting Standard”) has made the determination of “tax residence” increasingly important.

At the risk of oversimplification, a determination of “tax residency” can be based on a “deeming provision” or decided by a determination “based on the facts”. Some countries base “tax residency” on both “deeming provisions” and a “facts and circumstances” test.

Tax Residency in Canada – “Deemed residence” or “ordinary residence based on the facts” …

Continue reading