Venezuelan nonresidency status for Canadian - Ask an

David Ingram,
You were referred to me by Neil McFadyen, (tax
discrimination and economic
independence home page).
Briefly (well as brief as can be and get the pertinent
facts out) this is
my situation.
I am currently (almost three years now) on assignment
for an engineering
company on a construction project in Venezuela. I am
due to be released in
5 weeks am then will be transferred back to the
Vancouver office. I am now
currently employed by one of our subsidiaries (a paper
Bahamas based
company) that was created to allow Canadians to take
advantage of the OETC
as although we have a Canadian office our parent
company is based in the
When I left for this assignment (with my wife and two
small children) I
rented out my house. All my personal goods were put
into storage including
my car and nothing else changed ( banking, personal
RRSP's, credit cards,
professional membership, drivers licence). Although I
thought I was to be
given a preassignment tax counselling all I received
was a phone call to
discuss my situation. I don't recall any conversation
about residency and
definitely nothing about capital gains.
When tax time rolled around the company accountants
filed me as
non-resident. By our policy we are obliged to have
there representative do
our taxes. I thought nothing of it at the time as I
assumed they new what
they were doing and I always thought non-resident was
better for both
Our company has a tax equalization policy that briefly
states that they
will deduct from us hypothetical tax (approximately
equal to federal tax)
and they will pay all taxes home and abroad on the
assignment income. This
method of claiming the OETC is currently pending a
court case as CRA has
disallowed it for everyone involved. The company states
that they will pay
everything but I cannot help but be concerned.
Recently I put my home on the market, purchased a new
home and sold the
original home. That deal (the sale) will close two days
after I return home
from this project. I have since discovered that I am
liable for capital
gains on the increasing value of this property while it
was a rental. Since
that time I have been investigating the nonresidency
requirements and
declarations of rental properties.
I firmly believe that I am not non-resident but a
factual resident. I have
passed on my thoughts to our accountant but they are
also firm in there
position of my nonresidency. I have requested the NR73
but they have not
yet complied with that request.
I feel that in the least they should pay the capital
gains but what I am
more concerned with is a tax audit that changes my
residency from non to
factual. At that time they would (in my name!) incur a
huge tax liability.
Although the according to the policy they would be
required to pay I am
concerned that if I am no longer working for them or
worse that they just
let me hang out to dry. Further to this I believe they
were negligent in
not providing me proper tax counselling prior to my
This is my plan:
The wording on our policies state to the effect that
once I am terminated
from the Vancouver Office and transferred to the
Bahamas office there is no
guarantee of being employed again. This has to my
knowledge never happened
but is wording to get around one of the OETC or
non-resident criteria. In
fact when I returned from the last assignment in 1999
the office was
terrible slow, many were being laid off but they
rehired me even though
there was no work and then loaned me out to another
engineering firm.
Once I return home and am once again employed by the
Vancouver office I
wish to hire you to look into this and prepare a letter
(if in fact I am
correct) to inform them that we believe this situation
to be as I stated
and that they filed for me in error as a non-resident
and ask them to refile
the past two years as a factual resident. They also
would be liable for all
taxes and penalties.
If they are correct then I will pay the capital gains a
nd retain you to get
involved for the next assignment, probably at the end
of 2005 or so.
I plan not to do anything more on this until I return
unless you recommend
Are you interested and can we make this arraignment?
david ingram replies:
I agree that you maintained many residential ties to
Canada and are likely a factual resident.  You kept
credit cards and driver's licences, memberships and
even left your furniture here.
If you had been in Saudi Arabia or the Bahamas, the CRA
would have a field day with you.
And when I first though of it, I assumed that you had
been transferred to Venezuela before the treaty was
signed but you say "almost three years and the treaty
was signed more than three years ago so was in force
when you moved.
BUT, you did move to and are in Venezuela
and on July 10, 2001, we signed the Following
Convention Between the Government of Canada and the
Government of the Bolivarian Republic of Venezuela For
the Avoidance of Double Taxation and the Prevention of
Fiscal Avoidance and Evasion With Respect to Taxes on
Income and on Capital
The Government of Canada and the Government of the
Bolivarian Republic of Venezuela, desiring to conclude
a Convention for the avoidance of double taxation and
the prevention of fiscal avoidance and evasion with
respect to taxes on income and on capital, have agreed
as follows:
Skip Articles 1 to 3
Article 4 reads as follows:
1. For the purposes of this Convention, the term
"resident of a Contracting State" means:
(a) any person who, under the laws of that State, is
liable to tax therein by reason of the person’s
domicile, residence, place of management, place of
incorporation or any other criterion of a similar
nature but does not include any person who is liable to
tax in that State in respect only of income from
sources in that State, and
(b) the Government of that State or a political
subdivision or local authority thereof or any agency or
instrumentality of any such government, subdivision or
2. Where by reason of the provisions of paragraph 1 an
individual is a resident of both Contracting States,
then the individual’s status shall be determined as
(a) the individual shall be deemed to be a resident
only of the State in which the individual has a
permanent home available and if the individual has a
permanent home available in both States, the individual
shall be deemed to be a resident only of the State with
which the individual’s personal and economic relations
are closer (centre of vital interests);
(b) if the State in which the individual’s centre of
vital interests cannot be determined, or if there is
not a permanent home available to the individual in
either State, the individual shall be deemed to be a
resident only of the State in which the individual has
an habitual abode;
(c) if the individual has an habitual abode in both
States or in neither of them, the individual shall be
deemed to be a resident only of the State of which the
individual is a national;
(d) if the individual is a national of both States or
of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual
3. Where by reason of the provisions of paragraph 1 a
company is a resident of both Contracting States, then
its status shall be determined as follows:
(a) it shall be deemed to be a resident only of the
State of which it is a national;
(b) if it is a national of neither of the States, it
shall be deemed to be a resident only of the State in
which its place of effective management is situated.
4. Where by reason of the provisions of paragraph 1 a
person other than an individual or a company is a
resident of both Contracting States, the competent
authorities of the Contracting States shall by mutual
agreement endeavour to settle the question and to
determine the mode of application of the Convention to
such person.
Because your job and family were in Venezuela and your
house was rented out to a stranger and not "available"
for your use, 4(2)(a) says that you are exempt form
Canadian tax on the Venezuelan income.
In addition, I will bet that your accountants failed to
file form T1161 to report your house when you left the
country.  If you did leave as a non-resident, this form
should have been filed and if it was not, you are
"both" liable for a $2,500 fine assuming that the
family house was in joint tenancy with your wife.
This is the form to calculate the tax on the T1161
This is the form that defers tax on the deemed
The advantage of being a factual resident is that the
house was theoretically not taxable while you were out
of the country AND you do not even owe the 20% that is
usually owed when you are working under an Overseas
Employment Tax Credit (OETC).
As a matter of interest, we have recently filed two
such Factual Resident returns with success in
situations similar to yours.  We are having a little
trouble with the CRA trying to convince them to amend
some returns which were originally filed as residents
of Canada for 1999 and 2000 and we are trying to amend
them. We only have one such problem however and that is
for a Seattle resident and technically, the CRA does
not even have to open the 1999 and 2000 returns.
You would be ahead of the game to goto
and read the [US/Canada Income tax] section  (first or
second box down on right hand side).  Pay attention to
the Dennis Lee Case and the Judge Teskey decision and
then read the case in front of and following Dennis
 I would be glad to assist you when you are ready.
david ingram
Answers to this and other similar  questions can be
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