Tax residency anxiety

[SuzieCanuck]

Hello,

I am a Canadian Citizen, and have been living and working for the last year or so. As my visa is for 3 years (with no guarantee that I can renew it) I have retained several SECONDARY ties to Canada (bank, securities and RRSP accts, DL, car, professional registration). However, I should note that I have no spouse or residence in Canada, and have only been back to Canada for 2 weeks to visit my family for x-mas. My accountant maintains that despite my significant secondary residential ties to Canada, I am a deemed non-resident of Canada by virtue of the UK-Canada tax treaty because my ties are closer to the UK (presumably because I work, rent a flat, and have healthcare here). Is this correct? The accountant seems to know what he's talking about but I still worry about what degree of risk I am exposing myself to (we are talking about the CCRA here...). I have not filed NR73 (was told not to unless CCRA asks).

A few questions:

1. Assuming I file a departure return, How likely are the CCRA to question my residency status; are emigrants to treaty countries typically scrutinized?

2. What documentation should I keep to protect myself in case of audit?

3. If the CCRA don't question my return at departure, whats the likelihood of having an issue when I repatriate?

4. What is the role of SECONDARY ties in the UK? Does it matter that I haven't yet established all the SECONDARY ties that I have in Canada in the UK (for instance, I've started the process for professional registration but it takes at least 2 years to complete...and maintaining my Canadian registration is a requirement for getting UK registration!!!).


Thanks,

Suz

[SuzieCanuck]

sorry - living and working in the UK.....

[Michael I. Atlas, CA]

I agree with your accountant. BTW, it is CRA, not CCRA-changed many years ago.

It all turns on the application of the tie-breaker rule in Article 4(2) of the treaty-I would go even further, and say that it is not a matter of having ties that are closer to the UK, but rather the fact that when you apply the first test, which is based on having a "permanent home" available, you should be able to stop at that point and conclude that you are UK resident. The usual view would be that even your "rented flat" in UK would qualify, and since, I assume that you have nothing equivalent in Canada, you can stop at that point.

I certainly agree that NR73 should not be filed-only the ill-informed file that if they can avoid that.

The likelihood of the CRA scrutinizing is quite low-all you should do would be to show on the last return you file as a resident the date that you ceased to be resident. If there are investments with accrued gains, you may have to deal with "departure tax" issues.

When you return, you just resume filing and indicate the date you became resident again-likelihood of CRA questioning is low, but if they do, you want to be ale to establish that you were a tax resident of UK, and your only "permanent home available" was in UK.

[SuzieCanuck]

Thanks, I really appreciate your input...its not that I don't trust my accountant but I tend to worry a lot and want to plan for every eventuality (who knows if thats even possible).

One thing I'm still a bit unclear on is how "a permanent home available" is defined in the tax treaty. My situation is that when I moved to the UK, I moved in with my boyfriend (who was renting a flat) and paid a monthly rent contribution to him. Seeing as he'd just signed a lease a couple months before I arrived, I did not think to have my name put officially on the lease until it came up for renewal. I do, however, have lots of correspondence linking me to the address going back to the day I arrived. Would the CRA view this unfavourably in the unlikely case they do decide to audit me?

[Michael I. Atlas, CA]

There is no actual definition in the treaty.

For sure, it does not have to be something you own, and the CRA has indicated that a rented apartment can qualify.

In your situation, it is kind of grey, in my view, as to whether your situation would qualify, and I would have to spend more time than I am able to try to come to a conclusion on that point. Certainly, it is arguable that it should qualify, but not clear.

If that is not a permanent home, then the next test is based on "centre of vital interests", which is often a very murky area-arguably, in your case, not in Canada, in which case should be UK resident, either on the basis that your centre if vital interests is UK, or if cannot determine, on the basis that your only "habitual abode" is in UK.

So, I think that one way or another, there is a strong case that you are non-resident under treaty.

Also, you should have to look at what the worst case scenario would be-if the CRA were to successfully contend that you were Canadian resident, they would have to give you foreign tax credit for UK tax, so maybe your exposure would not be that great in any event???

[SuzieCanuck]

Yeah - this is what worries me. Although from what I read in the tax treaty, the (murky) centre of vital interest test only is applied if you have a permanent home in BOTH states. If you don't have one in either, then you go directly to habitual abode test - correct? Maybe I'm ok then....


Thanks again for you time,

Suz

[Michael I. Atlas, CA]

Yes, I stand corrected-the tie-breaker rule in our treaty with the UK is different than the norm found in Canada's other tax treaties in that if there is no permanet home available in either country, you jump to the "habitual abode" test, which I think would lead to conclusion that you are UK resident (the usual pattern in other treaties is that if no permanent home in either state, you first look at centre of vital interests).