Dear Sirs:
Re: Canada - U.S. Income Tax Convention Paragraph 1 of Article IV
This is in response to your letter dated June 13, 1991 requesting a technical interpretation regarding the application of paragraph 1 of Article IV of the Canada - U.S. Income Tax Convention (the "Convention") to the following hypothetical situation:
1) a U.S. citizen comes to Canada for temporary employment and is physically present in Canada for more than 183 days during a particular calendar year, thereby being deemed resident in Canada throughout that year under paragraph 250(1)(a) of the Income Tax Act (the "Act");
2) in this period, the individual still maintains a home in the U.S. and may or may not have a permanent home available in Canada; and
3) the individual does not establish any other ties to Canada that could constitute residency.
You have asked whether the tie-breaker rules in Article IV of the Convention would apply to this individual.
We provide the following general comments.
In order for the tie-breaker test to be applicable, a person must be a resident of both Contracting states in accordance with paragraph 1 of Article IV of the Convention. To be included within the term resident, the individual must be liable to tax in a Contracting State by reason of his domicile, residence, place of management, place of corporation, or any other criterion of a similar nature. In the U.S. aliens are subject to tax by virtue of their residence and U.S. citizens are subject to tax by virtue of their citizenship.
It is a generally accepted principle that tax conventions are to be liberally interpreted, paying heed to the intentions of the negotiators.
We agree it would be inappropriate for a U.S. resident alien to benefit from the Convention while a U.S. citizen "ordinarily resident" or "domiciled" in the U.S. would not.
It is also our view that it is not intended that U.S. citizens, wherever resident, be considered residents of the U.S. for purposes of the Convention and entitled to the benefits thereof.
Paragraph 1 of Article IV of the Convention does not mention citizenship as a basis for liability to tax. Notwithstanding that the U.S. imposes tax on its citizens by reasons of their citizenship and aliens on the basis of their residence, it is our view that, for purposes of paragraph 1 of Article IV of the Convention, the group of persons who are liable to tax in the U.S. by reason of their residence should be interpreted to also include U.S. citizens who reside in the U.S. Accordingly, a U.S. citizen who would meet the "substantial presence" test in the United States if he were an alien, will be considered "liable to tax" for purposes of paragraph 1 of Article IV of the Convention.
Under this interpretation a U.S. citizen who is also resident in the U.S. would be regarded as a resident of the U.S. under paragraph 1 of Article IV of the Convention. Correspondingly, a U.S. citizen who was not ordinarily resident in the U.S. and not deemed resident in the U.S. under U.S. domestic law, would not be a resident of the U.S. under paragraph 1 of Article IV of the Convention.
We hope our comments are of assistance.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch