BETWEEN:
and
____________________________________________________________________
Appeals heard on January 22, 2007, at Montreal, Quebec.
Before: The Honourable Justice Lucie Lamarre
Appearances:
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant was a non-resident of Canada for the period from September 1, 1998, to April 1, 2000, the date of his return to Canada.
Signed at Ottawa, Canada, this 2nd day of March 2007.
BETWEEN:
DAVID SALT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The sole issue in the present case is whether the appellant was a resident of Canada while he worked for his employer, Alcan South Pacific Limited, an affiliate of Alcan Aluminium Ltd. ("Alcan"), in Brisbane, Australia, for the period from September 1, 1998, to April 1, 2000.
[2] The appellant was born and raised in the United Kingdom ("UK") where he graduated as a chemical engineer in 1963. He and his wife are still citizens of the UK today and have siblings there. The appellant left the UK with his immediate family in 1964 to work for Alcan in Jamaica; he stayed there for 10 years. He arrived in Canada in 1974 with his wife and two children and worked for Alcan here for two years. In 1976, he moved to Spain where he worked for five years and then worked another three years in Ireland. He came back to Canada in 1984, at which time he purchased a home in Beaconsfield, Quebec.
[3] On June 4, 1998, he was offered the position of managing director of Alcan South Pacific Ltd. in Brisbane, Australia, which he accepted on the same day (Exhibit A-1, Tab 1). The effective date of this assignment, which was to be for a minimum of two years, was August 1, 1998. The appellant was granted a visa giving him temporary residence in Australia until September 11, 2001 (Exhibit R-1). According to the appellant, requesting such a visa is the usual procedure followed by the employer to obtain a work permit abroad for expatriates. In fact, the appellant renewed that work permit on its expiration in September 2001.
[4] The appellant and his wife leased their house in Beaconsfield unfurnished, under commercial terms and conditions, for a 22 1/2-month period beginning on August 15, 1998, and ending on June 30, 2000, to a non-related person, Grant Nesbitt (Exhibit A-1, Tab 2). This tenant was found by a real estate agent whom they had hired. The 22 1/2-month period was fixed at the request of the tenant. The lease indicates that the landlord cannot terminate the lease except as provided for by law. Under section 1960 of the Civil Code of Quebec, a landlord wishing to resume possession of a dwelling must notify the lessee six months before the expiration of the lease if it is a fixed-term lease.
[5] In fact, in the present case, in February 2000 the appellant's employment in Australia was prematurely terminated after 18 months at the request of Alcan. The appellant was offered, and he accepted, a position with Alcan in Montreal. He and his wife accordingly returned to Canada in April 2000 but could not move back into their home before the end of the lease in June 2000.
[6] In Australia, the employer provided the appellant with a furnished house, and he moved into it with his wife and dog and part of their belongings. The rest was stored in Canada at the employer's expense (Exhibit A-1, Tab 1, section 6). During their stay in Australia, the appellant and his wife resigned all their Canadian memberships in different clubs and associations and joined associations in Brisbane. They kept only one Canadian credit card and cancelled the others. They cancelled phone and cable services, as well as subscriptions to publications, in Canada. They changed their insurance policy on their house from residential to commercial (rental) coverage.
[7] The appellant returned the car provided for him by his employer in Canada and he was provided with another one in Australia. Most of the appellant's salary, as well as the rental income from his house, was paid in Canada through a Canadian bank account kept by the appellant. The balance of his salary was paid in Australia. The appellant continued contributing to the Quebec Pension Plan and maintained his membership in the Alcan pension, life insurance and long-term disability plans (Exhibit A-1, Tab 1, section 3). Deductions for any required contributions to these plans were made from his salary paid in Canada.
[8] During their stay in Australia, the appellant came back to Canada for a total of 15 days for business purposes and his wife returned for a period of two weeks to visit their sons and their grandchild. Otherwise, the appellant and his wife took their vacation in Australia, Asia and Oceania.
[9] The appellant did not have to get a new driver's licence in Australia as his Quebec licence was accepted there. As for his Quebec health insurance card, although the appellant did not use it, as he had medical coverage for the services of doctors and dentists in Australia, he did not give it up during his stay in Australia. The appellant kept his investment portfolio (amounting to approximately half a million dollars) in Canada, with the exception of some investments in limited partnerships that he sold when he left Canada for Australia. The appellant also owned a condominium property in Ontario that he had purchased as an investment. It was always rented out to non-family tenants. With respect to his house in Beaconsfield, the appellant prearranged payment of the property tax from his bank account in Canada before departing for Australia. He declared in Australia and was taxed in Australia on his world income (including his investment portfolio and rental income) during his employment there. During the same period, he filed tax returns in Canada as a non-resident of Canada. In July 2001, the appellant and his wife returned to Australiaand stayed there until December 2002, when he retired.
Issue
[10] The question at issue is whether the appellant should be considered to have been a resident of Canada during his stay in Australia for the period from September 1, 1998 to April 1, 2000. The respondent submits that the appellant was still ordinarily resident in Canada within the meaning of subsection 250(3) of the Income Tax Act ("Act"), which reads as follows:
SECTION 250: Person deemed resident.
(3) Ordinarily resident. In this Act, a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada.
The respondent does not contend that the appellant is deemed to have been resident in Canada pursuant to subsection 250(1) of the Act.
[11] The appellant submits that he was not ordinarily resident in Canada during the period at issue. The appellant also submits that even if this Court should conclude that he was ordinarily resident in Canada, he should be deemed not to have been resident in Canada but to have been resident in Australia by virtue of the tie-breaker rules found in article 4 of the Canada-Australia Tax Convention, of which the relevant portion reads as follows:
Article 4
Residence
1. Subject to paragraph 2, for the purposes of this Convention, a person is a resident of one of the Contracting States if that person is a resident of that State for the purposes of its tax.
. . .
3. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:
a) he shall be deemed to be a resident solely of the Contracting State in which he has a permanent home available to him;
b) if he has a permanent home available to him in both Contracting States, or if he does not have a permanent home available to him in either of them, he shall be deemed to be a resident solely of the Contracting State with which his personal and economic relations are the closer.
Analysis
[12] It should be noted at the outset that the respondent concedes the appellant was a resident of Australia during the period at issue. In Thomson v. M.N.R., [1946] S.C.R. 209, Estey J. says at page 231 that "one is 'ordinarily resident' in the place where in the settled routine of his life he regularly, normally or customarily lives". Rand J., at page 224, defines the expression "ordinarily resident" as meaning "residence in the course of the customary mode of life of the person concerned, and it is contrasted with special or occasional or casual residence".
[13] It is generally admitted that a person may be resident of more than one country for tax purposes. Here the appellant left Canada under a two-year employment agreement with Alcan. He left with his wife and came back solely for business reasons. She came back for only two weeks during the period. They leased their house in Beaconsfield for a 22 1/2-month term, and under the Civil Code of Quebec the lease could not be terminated without giving notice six months prior to its expiry.
[14] Although the appellant and his wife had two adult sons living in Canada, they did not, as such, have a home available to them in Canada. As a matter of fact, on their premature return to Canada they could not move back into their house until the expiration of the lease. The appellant had other ties with Canada. Indeed, he had invested in a condominium in Ontariothat was leased to a third party. He also had a portfolio of investments in Canada. He kept his Canadian bank account, credit card, health insurance card and driver's licence. Most of his salary was paid in Canadian dollars into his Canadian bank account, and he contributed to the Quebec Pension Plan.
[15] In this factual context, to what degree did the appellant in his own mind and in fact settle into, maintain or centralize his ordinary mode of living, with his social relations, interests and conveniences, in Canada?
[16] Here we must not forget that the appellant was not born in Canada. All his siblings were in the UK. He has spent most of his life outside Canada. He settled in Canada in 1984 and purchased a house here at that time.
[17] Although the appellant maintained some significant ties with Canada, he also severed many other important ones. I therefore have some reservations about concluding that the appellant was ordinarily resident in Canada during his stay in Australia. In any event, I do not find that a decision on that point is crucial in the present case. Indeed, even though the appellant is considered by the respondent to have been ordinarily resident in Canada, he is nevertheless deemed not to have been resident in Canada by virtue of article 4 of the Canada-Australia Tax Convention, referred to above, and subsection 250(5) of the Act, which reads as follows:
250(5)
(5) Deemed non-resident. Notwithstanding any other provision of this Act, 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 the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.
[18] Indeed, I am satisfied that under the tie-breaker rule the appellant is deemed to have been a resident solely of Australia because that is the country in which he had a permanent home available to him. I do not find, on the evidence, that the appellant had a permanent home available to him in Canada during his stay in Australia.
[19] The commentary by the OECD (Organisation for Economic Co-operation and Development) Committee on Fiscal Affairs on article 4 (regarding the definition of resident) of the Model Tax Convention on Income and on Capital, in Model Tax Convention on Income and on Capital, condensed version, dated January 28, 2003, says the following at paragraphs 11, 12 and 13 at page 80 (see Respondent's Authorities, Tab 15):
11. The Article gives preference to the Contracting State in which the individual has a permanent home available to him. This criterion will frequently be sufficient to solve the conflict, e.g. where the individual has a permanent home in one Contracting State and has only made a stay of some length in the other Contracting State.
12. Subparagraph a) means, therefore, that in the application of the Convention (that is, where there is a conflict between the laws of the two States) it is considered that the residence is that place where the individual owns or possesses a home; this home must be permanent, that is to say, the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration.
13. As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.).
[20] His house in Canada having been leased to an unrelated third party on arm's length terms and conditions, the appellant is considered not to have had a permanent home available to him in Canada. This approach was even adopted by the Income Tax Rulings Directorate of the Canada Customs and Revenue Agency ("CCRA") in a discussion of Interpretation Bulletin IT-221R3 dealing with the determination of an individual's residence status (document number 2002-0135585 dated May 13, 2002; see Tab 9 of Appellant's List of Authorities. This position was adopted by the CCRA as being more consistent with the approach taken by the majority of Canada's tax treaty partners and by the OECD in interpreting for tax treaty purposes the term "permanent home available to him" (see extract from S. Lerman, "Hot Issues in Tax Compliance", [2002] Ontario Conference pp. 16:4 to 16:7, comments on the CCRA's reasons for changing IT-221R2 and issuing IT-221R3, Tab 14 of Appellant's List of Authorities).
[21] The CCRA's views on this first tie-breaker rule, i.e., the "permanent home" rule, even as far back as 1994, were that a permanent home was available to an individual if a dwelling was maintained in a condition suitable for year-round occupation, leased to a non-arm's-length party, or leased under an agreement that could be broken with three months' notice or less (see extract from O'Neil, Hopkins, Heller, Stephen, "Current Tax Issues An Update", [1994] Conference Report, p. 2:13, Tab 16 of Appellant's List of Authorities).
[22] In the present situation, the appellant's home was leased for a 22 1/2-month fixed term. Under the civil law of the province of Quebec, a landlord must give six months' notice in order to be able to resume possession of a dwelling or evict a lessee; see article 1960 of the Civil Code of Quebec, which reads as follows:
1960. A lessor wishing to repossess a dwelling or to evict a lessee shall notify him at least six months before the expiry of the lease in the case of a lease with a fixed term; if the term of the lease is six months or less, the notice is of one month.
In the case of a lease with an indeterminate term, the notice shall be given six months before the date of repossession or eviction.
[23] In the present circumstances, I conclude that the appellant did not have a permanent home available to him in Canada during the period at issue. The appellant is therefore deemed not to have been resident in Canada pursuant to article 4 of the Tax Convention and subsection 250(5) of the Act.
[24] The appeals are allowed and the assessments for the 1998, 1999 and 2000 taxation years are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant was a non-resident of Canada for the period from September 1, 1998 to April 1, 2000, the date of his return to Canada.
Signed at Ottawa, Canada, this 2nd day of March 2007.
"Lucie Lamarre"
Lamarre J.
COURT FILE NO.: 2005-2318(IT)G
v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Montreal, Quebec
DATE OF HEARING: January 22, 2007
REASONS FOR JUDGMENT BY: The Honourable Justice Lucie Lamarre
DATE OF JUDGMENT: March 2, 2007
APPEARANCES:
|
Counsel for the Appellant: |
J. L. Marc Boivin |
|
Counsel for the Respondent: |
Annick Provencher |
COUNSEL OF RECORD:
Firm: J. L. Marc Boivin
Montreal, Québec
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada