Conrad Black: Resident here, resident there, resident everywhere?

It is common for an individual to be resident in more than one country at a given time (i.e., to be a "dual resident"). Where an individual is resident in Canada as well as another jurisdiction, the final determination of the individual's residence status for purposes of the Income Tax Act (Canada) ("Act"), as a consequence of the possible application of subsection 250(5) of the Act, will generally require looking to the dual resident tie-breaker rules in Article 4 of Canada's tax treaties.¹ In other words, where subsection 250(5) applies, which is in most cases involving dual resident persons, the application of the treaty's dual resident tie-breaker rules in favour of the other country will cause the individual to be deemed a non-resident of Canada. In a recent Tax Court of Canada decision, Conrad Black v. The Queen, 2014 TCC 12, the Court dealt with the interaction between Canada's tax treaty dual resident tie-breaker rules and domestic laws in a fact situation where subsection 250(5) did not apply. Even though the decision reached by the Court was, in the authors' view, well founded and of little surprise, the decision brings to light a possible trap for certain dual resident taxpayers as a consequence of the coming-into-force provision of subsection 250(5).

Summary of the Conrad Black Decision

The decision was in response to a motion for a determination of a question of law made by Mr. Black's counsel prior to the hearing. Almost all material questions of fact had been agreed upon by the parties. The question of law for determination was phrased as follows:

Whether, in view of the Canada-United Kingdom Income Tax Convention (1978) and the Canada-United Kingdom Income Tax Convention Act (1980) the Minister of National Revenue ("Minister") may assess tax against the applicant on the basis that he was a resident of Canada for purposes of the Income Tax Act on any of the items described in subparagraphs 5(i) to (vi) and subparagraph 5(viii) of the Amended Amended Notice of Appeal.²

In 2002, Conrad Black was a resident of Canada for purposes of the Act. He was also a resident of the U.K. in the same year. Pursuant to the dual resident tie-breaker rules of the Convention, Article 4(2) deemed Mr. Black to be a resident of the U.K. and not Canada for the purposes of the Convention. Both Mr. Black and the Canada Revenue Agency ("CRA") agreed that subsection 250(5) did not apply to his fact situation. The CRA sought to tax Mr. Black, as a Canadian resident, on his worldwide income including income derived from duties of offices and employments performed outside Canada. These amounts were not remitted or received in the U.K. and therefore were not subject to tax in the U.K. If not taxable in Canada, these items would not have been taxed in either jurisdiction (i.e., double non-taxation).

Two Articles of the Convention were important to this case. First, as alluded to above, the parties agreed that the tie-breaker rule in Article 4(2) deemed Mr. Black to be a resident of the U.K. and not Canada for purposes of the Convention. Second, Article 27(2) of the Convention was at issue. Article 27(2) is a treaty anti-avoidance rule intended, in part, to stop double non-taxation, and various versions of this rule are commonly seen in tax treaties in which one of the Contracting States (e.g., the U.K.) taxes its residents on a remittance-based system. This provision basically ensures that where a person (e.g., Mr. Black) is relieved from tax in Canada on certain income pursuant to a provision of the Convention, and that person is subject to tax in the U.K. only on the portion of that income that is remitted to or received in the U.K., the relief granted by Canada under the Convention will only extend to the amount remitted to or received in the U.K. Consequently, the two primary issues related to each of these Articles were as follows:

a)      on the basis of subsection 30(2) of the Canada-U.K. Income Tax Convention Act 1980 ("Implementation Act"), which basically states that in the event of any inconsistency between the provisions of the Convention and the Act, the Convention prevails to the extent of the inconsistency, whether Article 4(2) of the Convention overrode the provisions of the Act which otherwise treated Mr. Black as a resident of Canada and thus prevented Canada from taxing Mr. Black on world-wide income; and

b)      whether Article 27(2) of the Convention applied, thus enabling the CRA to assess Mr. Black because the amounts sought to be taxed were not remitted or received in the U.K.

A. Parties' Submissions

Counsel for Mr. Black argued that because he was deemed to be a resident of the U.K. under the Convention, he could not be a resident of Canada for purposes of the Act. Being a resident of both the U.K. and Canada would be a "clear inconsistency"³ as envisioned by the Implementation Act, in which case the Convention would prevail. As such, he was not a resident of Canada subject to tax under the Act on his worldwide income. Furthermore, counsel for Mr. Black asserted that Article 27(2) did not apply, given that no provision of the Convention applied to relieve Mr. Black from Canadian tax under the Act – the non-taxation of Mr. Black's income was pursuant to the Act itself. Counsel submitted that Article 27(2) applied only to limit the application of the provisions in the Convention relating to dividends, interest and royalties – that is, situations where non-residents of Canada would otherwise be subject to Canadian tax on Canadian-source income pursuant to the Act.   

The CRA argued that under Article 4(2) Mr. Black was deemed a resident of the U.K. only for purposes of the Convention, and the dual resident tie-breaker rules in Article 4(2) did not affect his residency under the Act. Therefore, Mr. Black was a Canadian resident for purposes of the Act, and in the absence of a treaty provision denying Canada's right to tax, was subject to Part I tax on his worldwide income. Moreover, Article 27(2) overrode other provisions in the Convention that may have otherwise denied Canada the right to tax certain income, particularly non-Canadian source income, thus Canada maintained its full domestic right to tax income that was not remitted to or received in the U.K.

B. Reasons

The Court held that Mr. Black was a resident of Canada for purposes of the Act, was subject to tax under Part I on his worldwide income, and that Article 27(2) applied.

Chief Justice Rip began his analysis by noting that Article 4(2) defines "resident of a Contracting State" for purposes of the Convention. He applied a liberal and purposive approach to treaty and statutory construction, consistent with previous jurisprudence. Mr. Black's counsel had argued that there is an inconsistency between being a resident of Canada for purposes of the Act and a non-resident for purposes of the Convention, and therefore the Convention would prevail, requiring Mr. Black to be a non-resident for purposes of the Act. Chief Justice Rip considered that the meaning of the word "purposes" may assist in determining whether such a conflict existed. He looked at dictionary definitions of "purpose" and, in French, "sens," and concluded that the word "purposes" stresses a particular object, which in this case was the Convention itself. 

He held that there was no inconsistency "between being a resident of Canada for the purposes of the Act and a resident of the U.K. for the purposes of the Convention".⁴  In Canadian case law, for two statutes to be inconsistent, it must be impossible to apply them both:

[29]        I cannot find an inconsistency between the Convention and the Act in the language used and the intention of the drafters of the Convention, the Convention Act. The provisions of the Convention and the Act can work side by side without conflict or contradiction. For example, it is clear that if an income or capital item is not provided for in the Convention, Canada's authority to tax that item is not restricted by the Convention.

[30]        In Friends of the Oldman River Society ([1992] 1 S.C.R. 3) the Supreme Court held that for two statutes to be inconsistent they must either be so contradictory that following one law would require breaching the other or the two laws must be unable to stand together ...

There was nothing in the Convention preventing Mr. Black from being taxed on the amounts at issue. Furthermore, the Commentaries to the OECD Model Tax Convention fully support that the dual resident tie-breaker rules do not override domestic residence tax status. Chief Justice Rip stressed that the dual resident tie-breaker rules are about "giving one state's claim to tax priority or precedence over the other".⁵ This interpretation was consistent with one of the objectives of tax treaties, that is, to allocate taxing power between the contracting states. If the application of the Act resulted in a contravention of the Convention, there would have been an inconsistency; however, as Chief Justice Rip held that there was no intention in the Convention to exempt Mr. Black's income in the circumstances, there was no contravention and therefore no inconsistency.

If Mr. Black had remitted his income to the U.K., he would have been subject to U.K. tax, and taxing him in Canada as well would have resulted in a contravention of the Convention. Chief Justice Rip stated that if that were the case, however, Mr. Black could have availed himself of Article 21 of the Convention (the Elimination of Double Taxation).⁶

As for Article 27(2), Chief Justice Rip held that "it was debatable"⁷ whether the respondent needed to resort to Article 27(2) given that he has ruled that Mr. Black was a Canadian resident for purposes of the Act and there was no inconsistency between the Act and the Convention. He therefore rejected Mr. Black's contention that Article 27(2) could not apply, which was based on the supposition that Mr. Black was not subject to tax under the Act, and therefore could not be relieved from tax under any provision of the Convention. Chief Justice Rip addressed the arguments of the parties nonetheless, determining that words such as "income arising in Canada" should not be read into Article 27(2) - Article 27(2) applied to any form of income.

General comments

In the authors' opinion, focusing on the dual residence issue, Chief Justice Rip's decision and analysis regarding residence for the purposes of the Act versus the Convention, for the most part, was thorough and captured the spirit and object of the Convention and its intended interaction with the Act. As Chief Justice Rip pointed out in his analysis, there was an abundance of support in the Commentaries to the OECD Model Tax Convention, jurisprudence and excerpts from respected tax treaty experts that the definition of "resident of a Contracting State" in Article 4 does not override domestic tax laws. There is no inconsistency between a tax treaty and the Act where, for a dual resident taxpayer, Canada loses the tie-breaker under the treaty to the other Contracting State. Furthermore, the Convention is clear in that Article 4 defines "resident of a Contracting State" for purposes of the Convention only. One must only glance at the text in the distributive provisions of a tax treaty (i.e., in the case of the Convention, refer to Articles 6 through 20) to see that these provisions often can't even be read until it is established which Contracting State the otherwise dual resident will be considered a resident of for purposes of the treaty. The drafting of these Articles is generally premised on a person being a resident of one Contracting State who is receiving income from another Contracting State. Thus, when the tie-breaker rules in Article 4 of a tax treaty are applied and residence is awarded to one particular Contracting State, that determination is solely for purposes of the treaty. Canada would simply have to forfeit or reduce its right to tax on various sources of income based on the application of the distributive provisions in the treaty, but this would not affect factual Canadian residence under the Act. Inconsistencies between the Act and a Convention can arise out of contravening actions, such as if Canada tries to tax income that the treaty does not permit it to tax. Being resident of Canada under the Act is not a contravening action – it is simply a fact.

Even though Chief Justice Rip avoided making this a relevant factor in his decision,⁸ it is interesting to note that a decision by the Court to uphold Mr. Black's position would have rendered subsection 250(5) meaningless. There would be no need for this provision in the Act if treaty tie-breaker rules had the power to affect residence under the Act.

A. The real trap is Subsection 250(5) of the Act

The "interaction" issue between the treaty dual resident tie-breaker rules and residence status for purposes of the Act occasionally arises in situations where a taxpayer, or his advisor, has overlooked the ramifications of the coming-into-force provisions of subsection 250(5). Subsection 250(5) provides that:  "a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada." On a plain reading of subsection 250(5) without reference to the limitations in the coming-into-force provision, a taxpayer might reasonably conclude that he or she will not be resident in Canada at any time while a tax treaty deems him resident of the other country. However, as a consequence of the coming-into-force provision, that conclusion will be incorrect if the taxpayer was resident in Canada for purposes of the Act on February 24, 1998 and was, under a treaty, resident in the other country as well. Thus, subsection 250(5) applies only to individuals resident in Canada who became, under a tax treaty, also resident in the other country after February 24, 1998.

Subsection 250(5) initially only applied to dual-resident corporations, but was amended in 1998 to include individuals and trusts. Ironically, these 1998 amendments were an attempt to prevent the use of certain dual-residency tax planning techniques in which an individual might simultaneously take advantage of being a resident of Canada for purposes of the Act while claiming the benefits of the treaty as a resident of the other country for purposes of the treaty, basically denying or limiting Canada's ability to tax worldwide income. However, since the 1998 amendments, taxpayers and their advisors often utilise tax strategies relying on subsection 250(5) to ensure that Canada will not assert worldwide income taxing rights on individuals who want to maintain some residential ties to Canada, but intend to also live abroad, often in a lower tax jurisdiction or a jurisdiction that does not tax on worldwide income. The interaction of the dual resident treaty tie-breaker rules and subsection 250(5) often serves as an advantage to taxpayers in that they can achieve tax certainty regarding their Canadian residence status by ensuring their ties in the other country will result in the tie-breaker rules giving preference to the other country (e.g. ensuring that the individual only has a permanent home available to him in the other country and not Canada).   

As noted above, the coming-into-force provision for this 1998 amendment, as was later amended in 2001, grandfathered those individuals who were dual residents of both Canada and a treaty country on February 24, 1998. Consequently, such dual resident individuals would not be subject to any negative Canadian tax treatment, such as our departure taxes, as a result of being deemed a non-resident of Canada under subsection 250(5). However, if a taxpayer is not aware of this coming-into-force provision, which admittedly is easy to overlook, he might structure his residential ties in both countries thinking that the treaty tie-breaker rules will be settled in favour of the other country and, consequently, that he will be treated in Canada as a non-resident. That taxpayer may be in for a rude awakening if subsection 250(5) does not apply in his circumstances, and the treaty does not actually deny or reduce Canada's right to tax on certain sources of income, as may have been the case for Mr. Black. 

Mr. Black has appealed the decision of the Tax Court to the Federal Court of Appeal.

1 The vast majority of Canada's tax treaties utilise the dual residence tie-breaker provisions found in Article 4 of the OECD Model Treaty which includes a series of tie-breaker rules (permanent home test, centre of vital interest test, habitual abode test, national/citizen test).

2 Para. 1.

3 Para 9.

4Para 27

5 Para 33

6 Para 39 – Admittedly, the authors have struggled with this statement by Chief Justice Rip. The reference to Article 21 seems to be as a consequence of the fact that Article 20(A), the "Other Income Article", was not in force in 2002 and therefore Canada and the U.K. would have both maintained taxing rights under the distributive provisions of the Convention regarding certain income received by Mr. Black. Consequently, Article 21 would have applied and required the U.K. to provide foreign tax credit relief in respect of any Canadian taxes payable which would have avoided any double taxation. The confusion appears to be that for certain other income, such as the employment income earned by Mr. Black for employment duties exercised outside Canada (e.g. in the U.S.), Canada would have been denied its right to tax, in the absence of Article 27(2), under the distributive provisions (i.e. Article 15), and therefore no foreign tax credit relief would have been necessary.          

7 Para 55 – Again, the authors struggled with this wording in that, in the absence of Article 27(2), Canada would have been denied its right to tax Mr. Black on certain income under the distributive provisions of the Convention. So even if Mr. Black was considered a resident of Canada for purposes of the Act, the application of Article 27(2) was still vital to the respondent's case with respect to some of the sources of income at issue. It is possible that Chief Justice Rip is using the word "debatable" simply because counsel for Mr. Black, in its arguments that Article 27(2) did not apply, had relied solely on the "residence" issue which had not been accepted by the Court.   

8 Para 54