Japan Canada Income Tax Treaty Article IV (4 ) Article

 I am a Canadian citizen and I have been
living in Japan for the past 10 years and
working as a self employed teacher. I pay
income taxes in Japan and I have continued
to file income taxes in Canada my on
investments - mutual funds and bank
accounts. I have no other assets in Canada.
If I move back to Canada will I have to pay
back taxes? Are there any other issues I
should be aware of?
Thank you for your time.
david ingram replies:
Japan has an income tax treaty with Canada. Article IV
of the Treaty means that you are only taxable on your
world income in one or the other country. It is clear
that with no empty residence  in Canada, and presumably
a residence you live in available in Japan, you are
only taxable on world income in Japan.
Article 4 of Canada / Japan Income Tax Treaty reads as
1.  For the purposes of this Convention, the term
"resident of a Contracting State" means any person who,
under the laws of that Contracting State, is liable to
tax therein by reason of his domicile, residence, place
of head or main office, place of management or any
other criterion of a similar nature.
2.  Where by reason of the provisions of paragraph 1 a
person is a resident of both Contracting States, then
the competent authorities of the Contracting States
shall determine by mutual agreement the Contracting
State of which that person shall be deemed to be a
resident for the purposes of this Convention.
 I am willing to bet however, that you have "not"
reported your Canadian investment income in Japan.
Under the circumstances you are describing, you are
likely using your mother's or a friends address and
filing tax returns in Canada to report your investment
income, claiming full exemptions and paying no or
little income tax.
Any non-resident of Canada must report their
non-residency status to their bank and broker and have
them deduct 25% NON-resident tax from any interest or
dividends you receive.  With this done, NO Canadian tax
return is required or "should" be filed.
The good news is that the Treaty has two other articles
which reduce the taxes withheld in Canada to:
INTEREST: Article XI reads as follows and shows a 10%
withholding tax in Canada.
1. Interest arising in a Contracting State and paid to
a resident of the other Contracting State may be taxed
in that other Contracting State.
2. However, such interest may also be taxed in the
Contracting State in which it arises, and according to
the laws of that Contracting State, but if the
beneficial owner of the interest is a resident of the
other Contracting State, the tax so charged shall not
exceed 10 per cent of the gross amount of the interest.
DIVIDENDS: Article X reads as follows and shows a 15%
withholding tax in Canada
1. Dividends paid by a company which is a resident of a
Contracting State to a resident of the other
Contracting State may be taxed in that other
Contracting State.
2. However, such dividends may also be taxed in the
Contracting State of which the company paying the
dividends is a resident and according to the laws of
that Contracting State, but if the beneficial owner of
the dividends is a resident of the other Contracting
State, the tax so charged shall not exceed:
  a) 5 per cent of the gross amount of the dividends if
the beneficial owner is a company which owns at least
25 per cent of the voting shares of the company paying
the dividends throughout the period of six months
immediately before the end of the accounting period for
which the distribution of profits takes place;
  b) 15 per cent of the gross amount of the dividends
in all other cases
There is no Canadian Tax on Capital Gains from the sale
of publicly traded shares in Canada when owned by a
So, you likely (I am sure you are) behind in your
Canadian taxes and likely owe a little difference to
Japan.  You are likely paying about 30% tax in Japan
and would owe that much on your Canadian Interest and
Dividends. However, you could claim a foreign tax
credit for the taxes withheld in Canada.
You have to fix it.  Other wise you are guilty of
having filed false Canadian residential returns which
is one of the criteria in Judge Teskey's decision in
the Dennis Lee case.  Since your filed residential
returns (remember I am guessing her but after 41 years
at this, I bet I am correct) have not reported your
world income the CRA would be quite justified in trying
to add your world income to the residential returns you
filed claiming full exemptions.
It would not be double taxation because Canada would
give you credit for the tax paid to Japan but you could
expect about 20% more a year because of tax, penalties
and interest.
So, get it fixed by paying the 10% and 15% when
required for the last three years at least.
I would be happy to look after you if my surmise is /
was correct.
The Judge Teskey decision follows:  read it closely.
Remember, you are in a tax treaty country so all of the
rules do not apply but if you have filed residential
tax returns, you are in a little jeopardy.
Read the following David MacLean (Saudi Arabia) and
Dennis Lee Case and the Judge Teskey Decision.
So what are the rules?
Well, to leave Canada for tax purposes, you must give
up clubs, bank accounts, memberships, driving licenses,
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.
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 licenses 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
- 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
- rental of Canadian safety deposit box or post office
- 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
- 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
- burial plot in Canada;
- legal documentation indicating Canadian residence;
- filing a Canadian income tax return as a Canadian
- ownership of a Canadian vacation property;
- active involvement with business activities in
- employment in Canada;
- maintenance or storage in Canada of personal
belongings including clothing, furniture, family pets,
- 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
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.
Hope this helps
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321
New email to davidingram at shaw.ca
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