How would the Canada-U.S. Tax Convention (the "Convention") tie-breaker rules apply in a double residency case under the Convention and how could any double taxation be addressed? CRA responded:
In addition to the factors set out in … IT-447 … the Canadian competent authority may consider some of the following factors: the settlor's residency; the residency of the beneficiaries; the location of the property of the trust; the reason the trust was established in a particular jurisdiction, etc.
… In situations where the two countries cannot find common ground, it is possible that the negotiations result in the double residency of the trust.
After noting that CRA considers Sharlow JA's remarks on s. 94 in St Michael Trust Corp., to the effect that s. 94 "falls short of displacing the treaty definition of residence" (St Michael at para. 87), to be obiter dicta, CRA stated:
[T]he CRA remains of the view that trusts deemed resident pursuant to section 94 are residents of Canada for the purposes of the Convention and will not generally be prepared to relinquish their residency to the other Contracting State.
In addition, the legislative amendments … [under] the Income Tax Conventions Interpretation Act … a trust deemed to be resident in Canada pursuant to subsection 94(3) is deemed to be resident in Canada … for the purposes of the Convention. … [T]he effect of this new provision is to make it impossible to break the tie because it deems such an equality to be non-existent.
In the unlikely event that there is evidence of taxation imposed contrary to the Convention and double taxation, the Canadian competent authority has confirmed to us that it would be prepared to consider the matter and facts specific to the situation leading to double taxation in order to determine whether a unilateral solution is possible or if negotiations with the other Contracting State are required … .