QUESTION:
I am Canadian citizen, who has an opportunity to work in the Middle East
for a long term project, about 3-4 years. I am planning to move there with my
family, and wondering the tax liability on the income earned there. Also, I
would like to find out how to maximize the tax advantages, if there are any
for working overseas. By the way, I own couple of residential properties
which I am planning to rent out.
Thanks!!
david ingram replies:
I do not know of any better place to read the rules than the middle of the
"US/CANADA TAXATION" section that you will find at www.centa.com in the
second box down on the right hand side.
The defining case for you in Dennis Lee's case with the Judge Teskey
Decision.
I am taking that part out of the article and printing it here.
If you are going overseas, you need to sit down with someone that has done a
thousand (or at least a hundred) of them before. Unfortunately, most of the
out of Canada information is folklore. Read Judge Teskey's decision and you
will have a roadmap.
If you need to talk to someone, I am available - I charge $400 per hour and
typically your type of consultation can be done in one or two hours. If you
have further questions, I do not usually charge for a couple of short follow
up calls which always seem to be necessary.
The Dennis Lee case follows in a bit
OUT OF CANADA AND RESIDENT - IN CANADA AND NON-RESIDENT
It is possible to be physically "in Canada" and be treated as a Non-Resident
and it is possible to be out of the country for seven years, or never have
even lived in Canada, but wanted to, and be taxed as a Canadian resident as
the following three cases show. In case you missed it, the reason for the
different rulings is the "INTENT" of the parties involved. Wolf Bergelt
intended to leave Canada. David MacLean was only working out of the
country. He still maintained a residence and could not ever become a
resident of Saudi Arabia anyway. Dennis Lee "wanted" to live in Canada.
In 1986, Wolf Bergelt won non-resident status before Judge Collier of the
Federal Court, even though he was only out of the country for four months
and his family stayed behind to sell his house. He had given up his
memberships, kept only one bank account and rented an apartment in
California until his house in Canada was sold. Four months after his move,
his company advised him that he was being transferred back to Canada. Judge
Collier said his move was a permanent (although short) move and he was a
non-resident for tax purposes for those four months.
In 1985, David MacLean lost his claim for non-residence status even though
he was gone for seven years. He kept a house and investments in Canada and
returned a couple of times a year to visit parents. He had even been to the
Tax Office and received a letter on January 29, 1980 stating that his
Canadian Employer could waive tax deductions because he was a non-resident.
However, he did not advise his banks, etc. that he was a non-resident so
that they would withhold tax, he did not rent his house out on a long term
lease and he did not do any of the things that makes a person a
"NON-RESIDENT". Judge Brule of the Tax court of Canada said that he thought
Mr. MacLean had stumbled on the non-resident status by chance rather than by
design. In other words, to become a non-resident of Canada, you must become
a bone fide resident of another country. As a rule, only a Muslim born in
Saudi Arabia to Saudi Arabian parents can become a Saudi Arabian citizen.
The best that David MacLean can hope for is that he has a Saudi Arabian
temporary work permit.
In other words, when a person leaves a place, they usually leave and
establish a new identity where they are because the "new place" is where
they live now. Trying to "look" like a non-resident is not the same as
"BEING" a non-resident - think about it.
In 1989, Denis Lee won part but lost most of his claim for non-resident
status. He was a British Subject who worked on offshore oil rigs. He
maintained a room at his parents house in England and held a mortgage on his
ex-wife's house in England. For the years 1981, 82 and 83 he did not pay
income tax anywhere. in 1981 he married a Canadian and she bought a house in
Canada in June of 1981. On September 13, 1981, he guaranteed her mortgage at
the bank and swore an affidavit that he was "not" a non-resident of Canada.
[As I have said in the capital gains section of this book, bank documents
will get you every time.] During this time he had a Royal Bank account in
Canada and the Caribbean but no Canadian driver's licences or club
memberships, etc.
Judge Teskey said:
"The question of residency is one of fact and depends on the specific facts
of each case. The following is a list of some of the indicia relevant in
determining whether an individual is resident in Canada for Canadian income
tax purposes. It should be noted that no one of any group of two or three
items will in themselves establish that the individual is resident in
Canada. However, a number of the following factors considered together could
establish that the individual is a resident of Canada for Canadian income
tax purposes":
- past and present habits of life;
- regularity and length of visits in the jurisdiction asserting residence;
- ties within the jurisdiction;
- ties elsewhere;
- permanence or otherwise of purposes of stay;
- ownership of a dwelling in Canada or rental of a dwelling on a long-term
basis (for example, a lease of one or more years);
- residence of spouse, children and other dependent family members in a
dwelling maintained by the individual in Canada;
- memberships with Canadian churches, or synagogues, recreational and social
clubs, unions and professional organizations (left out mosques);
- registration and maintenance of automobiles, boats and airplanes in
Canada;
- holding credit cards issued by Canadian financial institutions and other
commercial entities including stores, car rental agencies, etc.;
- local newspaper subscriptions sent to a Canadian address;
- rental of Canadian safety deposit box or post office box;
- subscriptions for life or general insurance including health insurance
through a Canadian insurance company;
- mailing address in Canada;
- telephone listing in Canada;
- stationery including business cards showing a Canadian address;
- magazine and other periodical subscriptions sent to a Canadian address;
- Canadian bank accounts other than a non-resident account;
- active securities accounts with Canadian brokers;
- Canadian drivers licence;
- membership in a Canadian pension plan;
- holding directorships of Canadian corporations;
- membership in Canadian partnerships;
- frequent visits to Canada for social or business purposes;
- burial plot in Canada;
- legal documentation indicating Canadian residence;
- filing a Canadian income tax return as a Canadian resident;
- ownership of a Canadian vacation property;
- active involvement with business activities in Canada;
- employment in Canada;
- maintenance or storage in Canada of personal belongings including
clothing, furniture, family pets, etc.;
- obtaining landed immigrant status or appropriate work permits in Canada;
- severing substantially all ties with former country of residence.
"The Appellant claims that he did not want to be a resident of Canada during
the years in question. Intention or free choice is an essential element in
domicile, but is entirely absent in residence."
Even though Dennis Lee was denied residency by immigration until 1985 (his
passport was stamped and limited the number of days he could stay in the
country) and he did not purchase a car until 1984, or get a drivers licence
until 1985, Judge Teskey ruled that he was a non-resident until September
13, 1981 (the day he guaranteed the mortgage and signed the bank guarantee)
and a resident thereafter.
My point is made. Residency for "TAX PURPOSES" has nothing to do with legal
presence in the country claiming the tax. It is a question of fact. My
thanks to Judge Teskey for an excellent list. The italics are mine and refer
to the items which I usually see people trying to "hold on to" after they
leave and are trying to become non-residents. No single item will make you a
resident, but there is a point where the preponderance of "numbers" leap out
and say, "He / She is a resident of Canada, no matter what he / she says."
The case above is not unusual in any way. It is a fairly typical situation
in my office.
In 1990, John Hale was taxed as a resident on $25,000 of directors fees he
had received from his Canadian Employer and on $125,000 he received for
exercising a share stock option given to him when he had been a resident of
Canada (the option, not the stock). Judge Rouleau of the Federal Court ruled
that section 15(1) of the Great Britain / Canada Tax Convention did not
protect the $125,000 as it was not "salaries, wages, and other
remuneration". It was, however a benefit received by virtue of employment
within the meaning of section 7(1)(b) of the act.
Even a car you do not own can make you a resident as the next sailor found
out.
In 1988, Frederick Reed was claimed by the Canadian Government as one of
their own. He lived on board ship and shared an apartment with a friend in
Bermuda but only occasionally. He also stayed with his parents in Canada
when visiting his employer in Halifax. Judge Bonner of the Tax court ruled
that he could not claim his place of employ or the ship as his residence and
just because he did not have a fixed abode, did not make him a non-resident.
He was also the beneficial owner of a car in Canada which even though of
minor consequence, served to add to his Canadian Residency. He had in fact
borrowed money from a credit union to buy the car, even though it was
registered in his father's name. He had maintained his Canadian Driver's
licence as well.
An interesting case in June, 1989 involved Deborah and James Provias who
left Canada in October of 1984. They had sold a multiple unit building to
James' father on September 21, 1984 but the statement of adjustments did not
take place until December 1, 1984. They tried to write off rental losses and
a terminal loss against other income as `departing Canadians'. Judge
Christie of the Tax Court ruled that they had left before the sale and were
not entitled to the terminal loss or another capital loss as these could
only be applied against income earned in Canada from October 13, 1984 (the
day they left) to November 30, 1984 (the day before the sale) and there was
no income, only a rental loss.
But June, 1989 was a good month for Henry Hewitt. He had been a non-resident
living in Libya for four years and received some back pay after returning to
Canada. DNR tried to tax him on the money but Judge Mogan of the Tax Court
came to the rescue. He ruled that although Canadians were usually taxable on
money when received, that assumed that the money itself was taxable in
Canada, which was not true in this case.
In 1989, James Ferguson lost his claim for non-residency status but from the
information, it didn't stand a chance anyway. He had been in Saudi Arabia on
a series of one year contracts for four years. His wife remained employed in
Canada, and he kept his house, car, driver's licence, union membership, and
master plumber's licence. Judge Sarchuk ruled that he had always intended to
return to Canada and was a resident.
A similar situation involved John and Johnnie M. Eubanks in the United
States. He was working on an offshore oil rig in Nigeria with a Nigerian
work permit and attempted to claim non-resident status for the purposes of
exempting the foreign earned income exclusion. His wife was in the United
States at all times and because he worked 28 days on and 28 days off, he
returned to the U.S. for his rest periods using 4 days for travel and 24
days for rest with his family. He did not spend any 330 day period (out of a
year) in Nigeria and only had a residency permit for the purposes of working
in Nigeria. Judge Scott ruled he was a resident of the U.S. and taxed him
some $20,000 with another $6,000 penalties and interest.
The Tax departments in Canada and the U.S. issue Interpretation Bulletins
and Information Circulars and Guidance Pamphlets. These documents sometimes
get people in trouble because the individual reads the good part and doesn't
pay any attention to the exceptions. The following case ran contrary to a
Guidance Pamphlet issued by the IRS.
On and Off-shore Oil rigs were involved with William and Margaret Mount and
Jesse and Mary Wells. William and Jesse worked in the United Arab Emirates.
However, they kept their homes and families in Louisiana and kept their
driver's licences in Louisiana and voted in Louisiana. No evidence was shown
that they had tried to settle in The United Arab Emirates. Judge Jacobs
turned down claimed exclusions of approximately $75,000 each.
There isn't any question about what oil rig people talk about on oil rigs.
It has to be "how to beat the tax man". Unfortunately, they all seem to
think it is easy. Another such story follows.
In 1989, Clarence Ritchie found out that bona fide residence means just what
it says. You cannot be a non-resident of the U.S. for tax purposes if you
are not a bona fide resident of another country. He was working on the Mobil
Oil Pipeline in Saudi Arabia and although when he left he was married with a
couple of kids, by the time he returned permanently, he was a happily
divorced man. Judge Scott ruled that though he did not have an abode in the
United States, he had not established one in Saudi Arabia and therefore was
not entitled to the foreign earned income exclusion which requires you to be
away for 330 days out of 365. He had worked a 42 days on, 21 days off
schedule and usually returned to the U.S. for his days off although he did
spend time in Tunisia, England, Italy and Greece.
On a final note, as explained on page 143 of the "PINK" 17th edition of my
ULTIMATE TAX BOOK, it is possible to have three countries after you for tax.
If you are thinking of taking a job because a recruiter told you the money
is tax free, think twice and check three times with competent individuals
about what the rules "really are". No government likes giving up the right
to tax its citizens.
DEBT SECURITIES - BANK ACCOUNTS
Non-residents of Canada with investments in Canada are subject to a 25%
non-resident withholding tax on any money paid to them while they are out of
the Canada. Therefore, if they have $10,000 in the Bank of Montreal and they
live in Argentina, The Bank of Montreal must withhold 25 cents out of every
dollar of interest paid to the account. Most tax treaty countries such as
Great Britain, Germany, the United States, and Australia have a reciprocal
agreement with Canada that limits the withholding to 10% for interest.
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Note that Frederick Reid's car in Canada only made him taxable in Canada
because he did not have another tax home. When you are in a Tax Treaty
country, Article IV protects you from tax on your world wide income.
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