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Residency Test

Subject: Residency Number: 04-26 Date: 10/15/2004

Tax treaties should be considered in determining whether an individual is resident in Canada.

In a recent court case (Allchin 2004 FCA 206), the Federal Court of Appeal examined the residency test that must be undertaken in order to determine if an individual is taxable as a resident of Canada.

In the case at hand, Ms. Allchin claimed to be a resident of the U.S. in 1993, 1994, and 1995. She filed U.S. tax returns as a resident of the U.S. and did not file Canadian tax returns during those years. Ms. Allchin had a greencard that entitled her to permanently live and work in the U.S.

At the Tax Court of Canada level, the judge determined that Ms. Allchin had not severed her ties to Canada. Therefore, the judge determined that she was taxable in Canada as a resident of Canada.

The Federal Court of Appeal stated that the Tax Court judge failed to consider that the taxpayer might be a dual resident. This would mean that she could be a resident of the U.S. without having severed her ties to Canada. The Federal Court of Appeal went on to say that "the judge should have examined whether she was also resident in the U.S. for purposes of the treaty." The fact that the taxpayer was a green card holder and was required to pay tax in the U.S. regardless of her physical presence was a key factor that could not be ignored. The Federal Court of Appeal referred the case back to the Tax Court so that the Tax Court could analyze the tax treaty tie-breaker rules in order to determine where she was taxable.

This case is significant in that a tax court and, therefore, the CRA cannot only look at whether or not an individual is a resident of Canada. The CRA must determine if the taxpayer is a dual resident and, if they are a dual resident, then they must review the provisions of the Canada-U.S. Treaty. It is no longer enough to simply determine whether an individual is a Canadian resident.

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