who taxes paid leave or retirement income - Article IV

QUESTION:
Good morning David,
If an employee of a US company retires or goes on paid leave and relocates to Canada, where does he/she pay their tax?  In Canada or the US?  I'm being told that in this situation I would still be responsible to pay federal, state, and FICA taxes in the US which seems odd since I would be living in Canada.
Thanks for any advice you might have.
Regards,
jim
======================================
david ingram replies:
I am throwing this out to a large list to see if there is another opinion from any one else.
There are really two different questions:
1.     If I retire to Canada, where do I pay my tax?  
The answer is clear that you would pay 15% US tax on any US pension income from private sources such as a 401 or 403 or IRA plan and no tax to the USA on any Social Security.  You would pay regular tax on the pensions to Canada and claim a foreign tax credit which should be dollar for dollar for the 15% tax paid to the US.  You would pay tax on 85% of the social security to Canada. 
2.    If I relocate to Canada on paid leave, where do I pay my tax?
This is a tough one because you are not performing any services.  If you are not performing services and the money is properly being paid to you for past services in the US where the work was performed and is really a golden handshake and you can take another job in Canada, I would agree that you would pay US taxes first and then report the money again in Canada and claim credit for the taxes paid to the US.
If you are returning to your employer after your paid leave and you are really on what would be called a sabbatical, I think that you should be paying tax to Canada only and that the company should not deduct local taxes from you.   
The permanence of the relocation would also bear on the subject and might be governed by Article IV of the US / Canada Income Tax Convention (1980) which reads as follows:
Article IV - Fiscal Domicile - (it is the same number in most treaties)  
For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of that person's domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income derived by the estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries. For the purposes of this paragraph, a person who is not a resident of Canada under this paragraph and who is a United States citizen or alien admitted to the United States for permanent residence (a "green card" holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United states and that individual's personal and economic relations are closer to the United states than any other third State.  The term "resident" of a Contracting State is understood to include: 
(a) the Government of that State or a political subdivision or local authority thereof or any agency or instrumentality of any such government, subdivision or authority, and 
(b) (i) A trust, organization or other arrangement that is operated exclusively to administer or provide pension, retirement or employee benefits, and 
    (ii) A not-for-profit organization that was constituted in that State, and that is, by reason of its nature as such, generally exempt from income taxation in that State. 
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: 
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests); 
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; 
(c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; 
(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 
-------------------
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