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David Rotfleisch on Canadian Taxation for Airline Pilots: “Tax Residence vs Canadian Citizenship – It’s Complicated!”

posted 1 year ago

Canada has the authority to tax an individual’s income depending on two related factors. The first, tax residence of Canadian air pilots, examines the person’s ties to Canada on a social and economic level. If the person is a Canadian tax resident, the payment of Canadian income tax on all worldwide income is required. The individual’s source of income serves as the second connecting factor. Only income that is derived from sources within Canada, such as employment, business, the sale of a Canadian property, and investments (such as interest, dividends, rent, and royalties), is subject to Canadian income tax if the individual is not a resident of Canada for tax purposes.

The determination of a person as a Canadian tax resident is governed by three regulations. First, a person may be a common law resident for tax purposes in Canada. Second, under paragraph 250(1)(a) of the Income Tax Act of Canada, an individual may be considered to be a Canadian tax resident even though he or she is not a common-law resident. Third, in accordance with section 250(5) of the Income Tax Act, a person may be considered a non-resident of Canada.

It should be noted that the tax residence of Canadian Air pilots differs from the residence determined for immigration: You can be a Canadian tax resident even if you are not a Canadian permanent resident or citizen, and you can be a Canadian citizen or permanent resident but fail to be a Canadian tax resident.

This article demonstrates the complexity involved in evaluating a person’s status as a tax resident by looking at two situations, each involving Canadian airline pilots. In the cases of Hauser v. the Queen (2005 TCC 492, aff’d 2006 FCA 216) and Laurin v. the Queen (2006 TCC 634, aff’d 2008 FCA 58), the Air Canada pilot permanently relocated to the tropics after selling his home in Canada. However, the taxpayer didn’t continue to be a Canadian tax resident in one case while he did in the other. The findings demonstrate the need for a precise factual examination when determining the common-law concept of residence.

This article discusses the common-law residence, presumed residence, and deemed non-residence Canadian tax regulations before moving on to the two mentioned cases.

Factual Resident, also known as a Common-Law Tax Resident

The terms “resident” and “ordinarily resident” are used in Canada’s Income Tax Act, but neither is defined there. Therefore, defining residence for tax purposes belongs to Canadian courts.  The term “common-law residence” (sometimes known as “factual residence” because the common-law analysis requires a thorough examination of the individual’s circumstances) is frequently used to refer to the court’s definition of tax residence because Canada’s judiciary adheres to the common-law system.

A taxpayer’s tax residence is defined by the Supreme Court of Canada in its landmark 1946 decision, Thomson v. Minister of National Revenue, in various ways, including as “the place where in the settled routine of his life he regularly, normally or customarily lives,” and that evidence of a taxpayer’s residence is determined by “the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living.”

There are a number of factors that determine if someone is a factual resident of Canada:

  • past and present life habits of the taxpayer;
  • the taxpayer’s frequency and duration of travels to the region where residence is claimed;
  • ties the taxpayer has to that jurisdiction;
  • other connections of the taxpayer; and
  • the duration of the taxpayer’s stay or the reasons for it.

Canadian courts and the CRA keep an eye out for the following when assessing a taxpayer’s ties to a certain jurisdiction:

  • a residence inside the jurisdiction;
  • a spouse or common-law partner residing in the jurisdiction; and
  • a dependant within the territory.
  • personal property inside the jurisdiction (including furniture, clothing, vehicles, and recreational vehicles);
  • social links to the jurisdiction (such as participation in Canadian religious or recreational organizations);
  • economic ties to the jurisdiction (including employment with a Canadian employer, involvement in a Canadian business, and possession of bank accounts, retirement savings plans, credit cards, and securities accounts in Canada);
  • immigrant status or the necessary jurisdictional work permits;
  • coverage for a hospital or medical insurance in the jurisdiction;
  • a valid driver’s license for the jurisdiction;
  • A vehicle that is registered in the jurisdiction;
  • a seasonal home or rented dwelling inside the jurisdiction;
  • a passport that the jurisdiction has issued;
  • union or professional organization memberships within the jurisdiction; and
  • other ties to a residence, such as a mailing address, post office box, safe deposit box, personal stationery (including business cards), and phone numbers.

Jurisdictional ties are not all given the same weight. The first three ties—dwelling, spouse, and dependent—are regarded as important ties to jurisdiction by both Canadian courts and the CRA. That is, it will be highly likely that a taxpayer is a Canadian tax resident if the taxpayer has a spouse, child, or residence in Canada.

In essence, there isn’t any one factor that stands out as being particularly crucial for figuring out whether a person is a factual resident of Canada. In most cases, the problem will be decided by a number of factors taken together. Because of this, the law frequently seems contradictory.

Paragraph 250(1)(a): Deemed Resident Under the Sojourner Rule

According to paragraph 250(1)(a), a person is considered to have been a Canadian resident for the entire tax year if that person “sojourned” in Canada for 183 days or more during the year. The sojourner rule basically states that if you “sojourned” in Canada for 183 days or more in a year, you are considered to have been a Canadian resident for the entire tax year.

If you visit, you sojourn. Sojourners are not required to “customarily live” in Canada or have a “settled routine” there, unlike common-law residents. Or to put it another way, a sojourner is assumed to be a non-resident. Therefore, if you became or ceased to be a factual resident of Canada during a year, paragraph 250(1)(a) does not apply to you. It only applies if you were a non-resident of Canada for that period.

Subsection 250(5): What Deems Non-Residence

The Income Tax Act, Section 250(5), declares a person to be a non-resident of Canada if a Canadian tax treaty makes that person a tax resident of Canada’s treaty partner. This rule ensures that Canadian domestic law and tax treaties are consistent.

Furthermore, paragraph 250(5) supersedes both common-law residence and the deemed-resident sojourner criterion in paragraph 250(1)(a). In other words, if subsection 250(5) applies, the taxpayer is a non-resident of Canada, even if the taxpayer would have been a considered resident under paragraph 250(1)(a) or a factual resident under common law otherwise.

Residence is frequently addressed in Canada’s tax treaties. The treaty residence clause will initially defer to domestic tax legislation in every country. That is, the tax treaty considers a person to be a tax resident in the country whose domestic tax rules consider that person to be a resident. However, if each country’s domestic tax laws make this claim, the treaty establishes tie-breaker procedures that limit the person’s tax residency to only one country.

For instance, the Canada-US Tax Treaty’s Article 4(2) contains the typical tie-breaker provisions. The tests listed below determine a person’s residence status under Article 4(2) as a dual tax resident of Canada and the United States:

  1. Only the jurisdiction in which the person has a permanent home available shall be considered to be the individual’s place of residence.
  2. The person will only be considered a resident of the jurisdiction with which he or she has closer personal and economic ties (the centre of the individual’s vital interests), regardless of whether having a permanent residence available in both jurisdictions or in neither.
  3. If it is not feasible to determine the jurisdiction in which the person has a centre of vital interests, the person will only be deemed a resident of the jurisdiction in which he or she habitually resides.
  4. The person will only be deemed a resident of the jurisdiction in which that person is a citizen if he or she has a habitual abode in one of the two jurisdictions or in neither.
  5. The competent authorities of the two jurisdictions, i.e., the Canada Revenue Agency and the Internal Revenue Service, shall resolve the issue by mutual agreement if the person is a citizen of both jurisdictions or of neither jurisdiction.

Once more, these tie-breaker provisions only apply if the taxpayer is a resident under the domestic tax laws of both treaty countries; if the taxpayer is a resident of only one country, they do not apply.

Tax Residence in the case of Hauser v the Queen (2005 TCC 492; aff’d. 2006 FCA 216)

In Hauser v. the Queen, the taxpayer—a pilot for Air Canada—sold his property in Canada and relocated his family to the Bahamas after obtaining an immigration residence permit there. He leased a furnished townhouse in the Bahamas (with the possibility to purchase it).  He sent all of his personal belongings to the Bahamas, cancelled his Canadian health and auto insurance, and created a bank account there. He kept a Canadian bank account open so that his employer, Air Canada, could deposit his pay directly into it.

 By designating his mother-in-law’s Canadian address as his mailing address, he also changed his contact information with his Canadian bank. Her home served as his primary mailing address as well. After relocating to the Bahamas, the taxpayer continued to spend roughly a third of every year thereafter in Canada because his employer required him to do so in order to fly airplanes; he reported for work at Canadian airports; the majority of his flights originated from and landed at Canadian airports; and the majority of his training was conducted in Canada.

He frequently visited his mother-in-law, his parents, or his friends while in Canada. During these trips, he often packed all he needed with him, but he also maintained some seasonal clothing and an Air Canada uniform at his mother-in-law’s home.

The taxpayer had been assessed by the Canada Revenue Agency to be a Canadian tax resident. The case ultimately ended up in the Tax Court of Canada after the taxpayer filed a notice of objection with the CRA that was unsuccessful and then file a notice of appeal to the Tax Court.

Due to the fact that the taxpayer’s “presence in Canada was not occasional, casual, deviatory, intermittent, or transitory”, the Tax Court came to the conclusion that “he was in Canada in great part because he had to be, to earn a living”.

The ruling of the lower court was upheld by the Federal Court of Appeal.

Non-Residence as Illustrated in Laurin v the Queen (2006 TCC 634, aff’d. 2008 FCA 58)

In Laurin v. the Queen, the taxpayer and his common-law spouse were first residents of Canada. The two shared ownership of Canadian property during that time.  When their relationship eventually ended, the taxpayer sold his share of the property to his ex-spouse. In addition, he cancelled all of his Canadian bank accounts except for the one where Air Canada, his company, deposited his pay cheques, switched his Canadian driver’s license for an American one, sold his Ford Bronco, and cancelled his health and auto insurance.

After some time, the taxpayer relocated to the Turks and Caicos Islands, where he rented a furnished apartment. The taxpayer carried on working for his Canadian employer, Air Canada, throughout this time. As a result, he frequently travelled back to Canada in order to attend meetings and make it in time for his flights, with Canadian airports as the primary departure points. The taxpayer still had friends and family in Canada, and he frequently travelled there to see them. He never established himself in any of these residences; instead, he stayed as a guest with friends or family when on visits to Canada, carrying everything he needed.

The taxpayer’s status as a Canadian tax resident was assessed by the Canada Revenue Agency. The taxpayer raised an objection, claiming that he was no longer a Canadian tax resident. The Tax Court of Canada eventually heard the dispute.

The Tax Court upheld the taxpayer’s viewpoint. The taxpayer was no longer a resident of Canada, the court found. “He broke up with his girlfriend, he got rid of his house, his car, his license, and his health insurance,” the court said, concluding that he had severed his residential links to Canada and that he had no home there that was available to him. He stayed with friends when he first arrived in Canada, but it was at their expense.

The ruling of the lower court was affirmed by the Federal Court of Appeal.

The Significant Differences: Making Sense of Hauser and Laurin

One might find the decisions in these two cases to be confusing. After all, the circumstances are remarkably similar: A Canadian airline pilot departs for a tropical nation without leaving behind a home, a spouse, or children. Both taxpayers went back to Canada in order to fulfill their employment obligations. For the purpose of receiving salary payments, both taxpayers kept a Canadian bank account. The Hauser taxpayer did, after all, leave an extra Air Canada uniform at his Canadian mother-in-law’s house. But is the uniform of one pilot what actually distinguishes these cases?

Hauser was decided by the Tax Court before Laurin. Therefore, the court took Hauser into account while making its decision in Laurin. The court’s remarks also show that there are times when it really is a question of hair-splitting:

Unlike Mr. Hauser, the appellant did not build a sense of permanence at any of his three hosts’ homes during his stays in Montreal, nor did he have a mailing address there. In addition, the evidence presented showed that, in contrast to Mr. Hauser, the appellant had no investments or business activities in Canada. He had relatives in Montreal, but he hardly ever saw his sons. His boys also paid him a visit while they were in TCI. He stayed in Montreal on three separate occasions—two for medical needs and one for his mother’s demise.

The distinctive characteristics don’t seem to be very important. At his mother-in-law’s house, Hauser received mail and may have created a “sense of permanency” by leaving behind some clothing and an extra pilot’s uniform. Hauser’s “investment or business activities” included a project that never even got off the ground due to his inability to acquire funding.  Consequently, it appears that everything was decided by a mailing address, a pilot’s outfit, and a pipe dream.

Tax Pro Tips: Getting Certainty About Your Residence Status or Relieving Yourself of Tax on Unreported Foreign Transactions or Property

The Hauser and Laurin rulings serve as an example of how seemingly unimportant factors can make all the difference in your eligibility as a Canadian tax resident.

Misconstruing your tax-residence status might cause you to erroneous underreporting or over-reporting of your Canadian taxable income. Both have repercussions: under-reporting may cause monetary penalties, while over-reporting may produce excessive Canadian tax liability.

One way to be certain when filing your Canadian tax return is to submit a residence-determination request. Using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada), you can request the Canada Revenue Agency to determine your residence status. You will then get a response from the CRA with its Canadian tax residence status assessment.

However, the CRA’s assessment is only as reliable as the information you provide. Additionally, the administrative perspective of the CRA does not necessarily align with Canadian tax law. Therefore, in addition to framing the pertinent facts, your residence-determination application must draw attention to the case law that supports your position. If not, the CRA agent evaluating your residence-determination application may make a negative conclusion that upholds the CRA’s interpretation while disregarding the law.

Additionally, the NR73 and NR74 forms used by the CRA to determine residence involve fairly intrusive questions regarding a taxpayer’s finances and assets. Consider carefully whether you wish to provide that information to the Canada Revenue Agency without being asked.

You can get guidance on your status as a Canadian tax resident from our knowledgeable Toronto tax lawyers. We can talk about whether your situation warrants a residence-determination request or only an internal memorandum. In that case, we can draft your residence-determination application to include the essential factual and legal analysis. If not, we can talk about different options to fit your needs.

Additionally, if your residence status changes, you can be liable for taxes on a deemed capital gain or penalties for failing to submit a foreign-reporting information return (such as forms T1134, T1135, T106, T1141, or T1142).

There is no tax liability associated with these reporting requirements. Because of this, many taxpayers incorrectly think they are unimportant. But taxpayers who fail to submit a mandatory foreign-reporting information return are subject to severe penalties under the Income Tax Act. For each form that is still unfiled, for instance, a simple failure to file might result in a fine of up to $2,500 (plus interest)! Additionally, the maximum fine can reach $12,000 if there was gross negligence in the failure to file. A T106, T1141, or T1135 that is more than 24 months overdue may also incur an additional 5% penalty.  If you hold certain foreign property with an estimated value of $100,000 or more, a T1135 form is required. Therefore, your minimum fine is $5,000 per unpaid year if you file a T1135 more than 24 months late.

If you submit an application through the Voluntary Disclosures Program (VDP), you might be able to avoid these penalties. To find out if a voluntary disclosure is an option, get in touch with one of our experienced Canadian tax lawyers.

See our article “Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada?” for additional information on determining your status as a tax resident.”

See our article Determining the Residence of a Corporation for Tax Purposes” for information on a corporation’s tax residence.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”

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