Residence Under the Canada-Russia Tax Treaty

We often have clients approach us asking how they can immigrate to Canada without become tax residents.  There are a variety of ways to do this, and the recent Tax Court of Canada decision in Denisov v. The Queen highlights one issue that those interested in not being tax-resident need to be prepared to address.

In Denisov, the appellant was a citizen of both Russia and Canada.  During the years that the appellant was alleged to have under-reported income, he had a dwelling place available to him in Montreal, as well as an investment condo. In addition, he had personal property and belongings in Canada. He had a Quebec drivers license and health card, a Canadian passport, a Canadian social insurance card, a Canadian cell phone, and numerous Canadian bank accounts. He was also the sole shareholder of a Canadian corporation. In numerous forms that he filled out he indicated that he was a resident of Canada.

Given this, the Court found that he was a tax resident of Canada.

However, the decision rested not on whether the appellant was a tax resident of Canada, but also on whether he was a tax resident of Russia. Pursuant to the Canada-Russia Tax Treaty, if the appellant was factually resident in both Russia and Canada, then the tie-breaker rule found in Article 4 of the Treaty would kick in and provide that he could legally be tax resident in only one country.  Thus, as with Canada-China Tax Treaty, an individual cannot be tax resident in both countries.

Article 4 of the Canada-Russia Tax Treaty is very similar to that contained in Article 4 of the Canada-China Tax Treaty. It states:

ARTICLE 4

Resident

1.       For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2.      Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a)      he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);

(b)      if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c)      if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a citizen;

(d)      if each State considers him as its citizen or if neither State considers him as its citizen, the competent authorities of the Contracting States shall settle the question by mutual agreement.

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 of the State under the laws of which it was created;

(b)      if it was created under the laws of neither of the States, it shall be deemed to be a resident of the State in which its place of effective management is situated.

The Denisov decision is unique in that Justice Angers never even had to go through the tie-breaker factors.  Instead, he found that the appellant was not a resident of Russia under the treaty. He held that section  1 requires an analysis beyond simply looking at whether an individual is factually a resident Russia.  Rather, the person has to be “liable to tax therein”. This decision was based on the Supreme Court of Canada’s decision in The Queen v. Crown Forest Industries Limited, where Justice Iacobucci stated:

[T]he criteria for determining residence in Article IV, paragraph 1 involve more than simply being liable to taxation on some portion of income (source liability); they entail being subject to as comprehensive a tax liability as is imposed by a state.

Here, the appellant could not demonstrate that he was subject to a comprehensive tax liability in Russia. The only tax he appeared to pay was a very small amount that was withheld by a Russian employer.  As well, although the appellant had tried to obtain a letter from the Russian authorities confirming his status as a resident of the Russian Federation, he was unable to do so.

Given this, Justice Angers found that the appellant was not a tax resident of Russia, and that he was liable to Canadian taxation on his worldwide income.

The implications of this decision are clear. If an individual is going to rely on a tax treaty to show that he/she is not legally a tax-resident in Canada, then that person should expect that he/she will be asked to prove that he/she was actually subject to tax under the other jurisdiction. It is not difficult to see the policy reasons behind this principle. After all, what would have stopped the appellant in this case from then going to Russia and arguing that he was only a Canadian tax resident, and avoid paying taxes in both jurisdictions?

Of course, if a person immigrates to Canada in a way such that it is clear that he/she is not a tax resident, then it may never even reach the audit stage.