NON-resident - TESKEY decision in Dennis Lee case - David MacLean Case

QUESTION: My broth-in-law is a Canadian citizen who has been residing
outside Canada for years, however, he will come visit his father-in-law once
in a couple of years. He has no oversea incomes and has not paid any tax in
overseas country. He did not report Canadian tax in the past years, even
though he owns a bank account and a condo which he left it vacant for years.
He bought another condo for renting investment last year, and he is thinking
of preparing tax for the year of 2006. My question is that: If a canadian
resident has no income at all, does he/she have to report a tax file as long
as he/she is not taking any of canadian benefits but only paying property
tax and holding a bank account for mortgage installment?


---------------------------------------------------------------------------
david ingram replies:

Canada has the right to tax a Canadian citizen on their world income when
the citizen does not have a tax home in another country. To have a tax home
in another country, he or she should be able to prove that they live in that
other country and are physically in their home country for most of the year.

If a person has a spouse and children in the other country where they
reside, it is relatively easy to prove where they live because all the
accouterments of living are with their family. It is more difficult for
single people who tend to use their parent's home as a mailing address, etc.

If he is a true non-resident, he will have had a resident Canadian sign an
NR-6 form for the rental real estate.

This is not an answer because I do not have enough information from your
question and have to say that it sounds like he should have a personal
consultation with me or someone like me about his residency status. In the
meantime, he should read the following:

Sent: Friday, October 13, 2006 2:21 AM
To: taxman@centa.com
Subject: Can a Canadian non-resident own a Canadian-registered sailplane?


Don't laugh, here's the logic....

We are Canadian citizens, non-resident for the last twenty years and have
filed as such each year for that entire period.
We have three Canadian residential rental properties but no other
discernible ties to Canada that I can think of.

I know that some Canadian non-residents maintain and annually utilize
holiday cottages as these are not winterized and therefore "are not
available for year-round use". Could a sailplane be owned without affecting
non-residency status for the same reasons i.e.. the machine can only be used
in the Canadian summer as by definition. Winter conditions preclude it's
use; for the winter it is physically disassembled and kept in a box....

Just wondering what you might think.
xxx
UAE
-------------------------------------
david ingram replies:

Since I know of people who have been taxed because of the ownership of a
cottage, I disagree with the year round use definition you have suggested.

And I have had the ownership of a golf cart or a car registered in a
father's name used to tax an individual.

Coming back to a summer cottage or a sailplane in Canada is dancing with
rattlesnakes in my opinion.

The term in article IV of most treaties is "home available" to him. The
words "year round" do not appear anywhere in the act or cases that I know of
although I am prepared to be wrong if anyone wants to correct me and give me
some case law to look at.

I was related by marriage to Ralph White an old time altitude record
sailplane pilot at Cowley, Alberta.

Read the following which was mainly written 20 years ago and only had a
couple of minor additions until Jan 2001 and nothing since. It comes from
the middle of "US/Canada taxation" in the second box down on the right hand
side at www.centa.com.

taxman@centa.com: Please see bottom of message if you wish to unsubscribe.
------------------------------------------
I have just been offered a position in the UAE starting in
October and lasting 2 to 3 years.
I plan to leave XXXXXXX at the end of September, return to Vancouver for a
couple of weeks and then travel to the UAE.
For this assignment their is NO "Hypo Tax". I am provided housing, kids
schooling, car, COLA,...(typical policy).
I am also planning on renting out my home (principle residence) and
currently looking for a Realtor or agency that handles that (know any?).
My rental plan is to rent the house furnished complete with gardening
services, pool maintenance, monitored alarm and others for $4500 per
month. Of that money approximately 1300 is my mortgage payment and 400
towards a line of credit that was also used to purchase the house. At a
glance that is very profitable but their is a lot of expenses in renting
out a furnished, serviced house. I am still unsure how best to deal with
utilities and will discuss that with the Realtor.
Although I cannot guarantee it I hope to make this my last long term
overseas assignment and then spend some time working in Vancouver and
enjoying life. Financially my goal is just to pay off all or most of my
mortgage with this assignment (325,000).

My questions:
1. What advise can you give me on this assignment?
2. Is the money really tax free?
3. I think I end up a resident of UAE, and worry about the tax implications
of my home value (capital gains) and any other concerns.
I do not yet know how I am paid, if paid in UAE how do I bring this into
Canada?
4. How can I best limit my taxes on the rental income?
To really complicate things part of the deal I am currently involved
with on this XXXXXXXX assignment is that XXXXXXXX accountant (XXXXXXX XXXXX
in XXXXXXXXX) must do my taxes. This is so that XXXXXXXXX can maximize their
concern in my taxes. I would like to get you doing my taxes perhaps
jointly(?) with XXXXXXXXXX next year for 2006 and then alone once I am out
of XXXXXXXX's tax grips.

5. Finally how is the best way to pay/invoice your services?
-------------------------
david ingram replies:

I just received this today - I was away for the last two weeks of August and
then on my return some 7,000 emails clogged up the system.

1. start off by reading the entire US/Canada section in the second box down
on the right hand side at www.centa.com - You will see Judge Teskey's list
of the things that make you taxable in Canada.

2. The money is tax free in Canada "IF" you manage to sever all the relevant
ties.

3. A disadvantage is that while you are a non-resident of Canada, any
capital increase in your house "is" subject to Canadian Capital Gains tax.
However, I am one who does not expect any big rise for the next 4 years.

4. Not much you can do. The net rent after management, property taxes,
mortgage interest, landscaping, etc. will be subject to Tax at about 25%.

5. Visa, MasterCard, cheque.

6. A rental Agent that can handle your out of country rental would be Ross
McDonald at Lighthouse Realty (604) 649-4871 or Crosby Management
(604)689-6902. Ross was my property management partner for many years and
manages some 100 properties for out of country owners. I no longer know
anyone at Crosby, but have three clients who use their services and seem
happy.


You should likely make an appointment and come and see me (with your spouse)
while in Vancouver.

david ingram

The following is the answer to another UAE question:

taxman@centa.com: Please see bottom of message if you wish to unsubscribe.
If you are new to the list, you were probably added because you sent a
question to taxman@centa.com, posted a question online at www.centa.com or
possibly at www.jurock.com
------------------------------------------

QUESTION:

We own land within a co-op on xxxxxx island, and a house in xxxxxxx that is
leased. We are both residents in Canada and have two children. We have RRSPs
and RESPs. What is the best course of action to take regarding taxes and
working in the UAE? We plan to be gone no more than three years. Thank you.


-----------------------------------------------
david ingram replies:



To go to the UAE and escape Canadian Tax you have to MOVE there, virtually
lock, stock, and barrel.

If your home is rented out on a long term basis and not available to you to
live in for a year, that usually solves the problem of the house being
available.

I am giving you a long loonnngg prior answer. However, if you are genuinely
going, you should consult with someone like myself to be sure.

------------------------------------------


QUESTION: RE: answer posted on Jan 11
I am a Canadian non-resident living and working in the middle east (6 years)
with my wife. We had cut ties with Canada (even drivers licences have now
expired) but last year put a deposit on a condo in Edmonton since we
anticipated moving back in the next year or so if employment terminated
here. However we have new contracts and expect to continue to stay away for
an indefinite period. Would lending finance to our son (a university student
who needs somewhere to live) to purchase the unit (and then for him to live
there) cause significant problems with our non resident status??
---------------------------------------------------------------------------
david ingram replies:

Anything you do in Canada is liable to cause you a problem. However,
loaning the money to your son to buy a condo should not pose a problem.

However, I would have been happier if it had been in his name to start with.
The fact that it was originally in your name and is now going into your
son's name could lead a suspicious CRA employee to think that it was only
going in his name to make it look like it was not yours and not available
for your use.

Whatever you do, DON'T stay there if you visit Canada!

Remember that the Rule is that there can NOT be a home "available" to you.
It does not have to be registered in YOUR name to be "available”. Staying
in it would be an absolute proof that it was available. Particularly, if
your son chose that time to stay with a friend or something and if it was
found to have your furniture “stored” in it.

Read Judge Teskey’s list in the following older questions:
------------------------------------------

Sent: Saturday, February 04, 2006 6:14 AM
To: taxman@centa.com
Subject: Canadian with US Investments


I am a Non Resident Canadian citizen living and working in Saudi Arabia.
I have been out of Canada for more than 10 years.

I have stock investments in Canada and the US.
I am listed as a Non Resident with these brokers.
I already have 25% Non Resident Tax deducted on interest income or
dividends.

These are the only investments I have in Canada or the US.

Do I have to file a tax return in either country?

_________________________________________________________________
david ingram replies:

As a non-resident there is no tax payable to the US or Canada on publicly
traded stocks.

As long as tax on dividends and interest is being deducted and you are
receiving NR4 slips from Canada showing that fact and 1042S slips for the
US, there is no reason for you to file a return in the US or Canada.

However, Canada DOES have a habit of taxing people who return from Saudi
Arabia because they kept things like a Canadian Driver's licence.

My advice would be to switch all your investments to the US broker and
closing down the Canadian accounts.

Read the following question and the "so what are the rules?" section from my
1991 Ultimate Income Tax Guide. i.e. it is all old stuff, not a new
interpretation.

------------------------------------------


QUESTION: I am a Canadian non-resident living in Asia for the past 11 years.
I am looking to buy a condo in Edmonton for investment purposes. If we do
not rent it out immediately and it sits empty to be used occasionally when
we visit family in Edmonton, will this jeopardise our non-resident tax
status?

Thanks

---------------------------------------------------------------------------
david ingram replies:

If you are in a tax-treaty country like Thailand or Indonesia, it will not
matter because your family is with you in Asia. However, if your spouse
wanders over to Canada and stays in the condo for five or six months, the
CRA will have every right to try and tax you and may succeed because Article
IV of the tax treaty will have your personal interests in Canada.

The Dennis Lee decision by Judge Teskey is one of the best ones to read.
you can go to www.centa.com and click on US / Canada taxation in the second
box down on the right hand side and it will give you a lot of information.
I am repeating some of it here.

.

So what are the rules?

Well, to leave Canada for tax purposes, you must give up clubs, bank
accounts, memberships, driving licences, provincial health care plans,
family allowance payments (if you are a returning resident, you can continue
to get Family Allowance out of the country), your car, and furniture. You
can keep a house here as an investment and rent it out, but it must be
rented on lease terms of a year or more. And you MUST have an agent sign an
NR6 for you (see example). This NR6 has the Canadian Resident AGENT **
guarantee the Canadian Government that if YOU do not pay your tax to Canada,
the AGENT WILL. Even after fulfilling the foregoing, the Canadian government
can still tax you or "try" to tax you on your income out of the country. If
you are being paid by a Canadian Company, they can quite often succeed.

Even though you can collect family allowance out of the country, don't! One
client's wife found out that she could get family allowance out of the
country if she said they were coming back to Canada. She got some $3,000 of
family allowance and cost the family some $80,000 in income tax when they
came back to Canada from Brazil. I will never forget the husband's
expression when he found out why he had been reassessed and I will never
forget his wife's explanation. She said he was a skinflint and never gave
her any money. The total episode cost them their house.

** The "agent" referred to above can be a friend, relative, or a business
such as ours. We charge a minimum of $40.00 per month to be an "AGENT" for
an NR-6 filing. This $480 per year is "in addition" to any other fees but
"well worth it" of course. It stops your mother, father, brother, next door
neighbour or ex-best-friend from being plagued by paperwork they do not
understand.

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 15%. So we have the
anomaly that a Canadian with money in a bank in the U.S. has no withholding
but an American with money in a Canadian Bank has 15 cents out of every
dollar withheld as a foreign withholding tax. The American would report his
interest on schedule A of his 1040 tax return and claim the tax withheld as
a foreign tax credit on a form 1116.

Comments (0)


CEN-TA Cross Border Services - Tax, Visas, Immigration
http://www.centa.com/article.php/20070322195510597