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1

Residence: Residents

What are the locations of sources of income that RESIDENTS are taxed on?

Residents are taxed on WORLDWIDE income (EXCEPT for individual residents, who are only RESIDENT for part of the year; taxed as non-resident when away)

2

Residence: Residents

How does the legislation deal with potential for double-taxation on residents?

Residents can be double-taxed on foreign income; dealt with by a) tax treaties, b) some ITA provisions allowing certain deductions

3

Residence: Residents

Briefly explain - how can tax be avoided through foreign corporations or trusts?

Can establish residence or incorporate in tax haven (b/c Corp and trusts treated as separate taxpayer from individual under ITA) -> then grow investment there at lower tax rate, essentially allowing income splitting and tax deferral

4

Residence: Residents

How does the ITA deal with tax avoidance on income earned outside Canada by having it ACCUMULATE in foreign corporation or trust?

ss 91-95 ("FAPI") deals with avoidance of tax on income earned outside canada by having it ACCUMULATE (different form active earning) -> requires REPORTING of income earned and HELD in offshore corp or trust

5

Residence: Residents

How else does the ITA deal with tax avoidance on investments (aka holdings) outside Canada?

ss 233.2-233.7 (in place after 1998) --> obligation to REPORT OWNERSHIP of holdings outside Canada worth > $100k

6

Residence: NON-Residents

What base are non-residents taxed on?

Taxed on "taxable income EARNED IN CANADA" -> meaning a) employment income, b) business income, c) disposal of taxable Canadian property

7

Residence: NON-Residents

What kinds of items do non-residents get taxed on?

a) employment income, b) business income, c) taxable Canadian property

Taxable Canadian Property (s.248(1)) includes - real property, capital property, shares in non-listed Canadian corp

8

Residence: NON-Residents

What is the tax rate for non-residents? What is the policy rationale?

For income (except exclusions from "taxable canadian property") - s. 116 PROGRESSIVE tax rate applies

Reason - competitiveness and capital import/export tax neutrality

9

Residence: NON-Residents

Describe the Part XIII tax.

Part XIII covers exclusions from "taxable canadian property" -> primarily INVESTMENT income --> subject to flat 25% tax (s. 212) (but often reduced to 15% by treaties)

10

Residence: NON-residents

How are Part XIII taxes collected?

Part XIII tax on non-residents' investment income --> RESIDENT is required by s. 215 to DEDUCT AND WITHOLD the tax from payment to the non-resident (otherwise difficult to enforce)

11

Residence: effect of tax treaties (intro)

What are 3 main purposes of tax treaties?

Tax treaties deal with:
1) Double taxation - eg tie-breaker rules
2) sharing of information for mutual enforcement
3) reduction of witholding taxes

12

Residence: effect of tax treaties (intro)

Identify 3 potential reasons for double taxation

1) persons can be RESIDENT in more than one country
2) taxes are imposed on non-residents
3) some countries (eg US) tax on a DIFFERENT BASIS than residence (citizenship for US)

13

Residence: effect of tax treaties (intro)

What is a primary way that tax treaties try to deal with double taxation?

Tax treaties address double tax by, among other things, having tie-breaker rules for where a person would be considered resident in both countries.

14

Residence: Theory

What are five theoretical rationales for taxing residents on world-wide income and non-residents on source income?

1) ECONOMIC ALLEGIANCE Theory, 2) BENEFIT Theory, 3) ABILITY to Pay, 4) NEUTRALITY, 5) ENFORCEABILITY

15

Residence: Theory

a) Briefly describe economic allegiance theory

Economic allegiance theory - tax cross-border transactions on basis that taxpayer has SUFFICIENT ECONOMIC CONNECTION to the country based on 1) value-added, 2) suppliers of capital, 3) consumers' location

16

Residence: Theory

b) Briefly describe benefit theory.

Benefit theory - those who BENEFIT from public services of a country should pay tax to cover the costs of those services

17

Residence: Theory

c) Describe Ability to Pay

Ability to pay - THEORETICAL BASIS TO tax Canadian residents on worldwide income -> worldwide income = ability to pay -> contribution should match ability (Vertical equity)

18

Residence: Theory

d) Describe Neutrality theory

- important factor in taxation of residents on world-wide income -> taxpayers should be taxed similarly on domestic income and foreign income --> don't want to give preference to domestic or foreign source for income

19

Residence: Theory

e) Describe Enforceability theory

residence - taxpayer that has connection (and assets) in Canada easier to enforce

Source - should get tax dollars before they leave country, otherwise hard to enforce

20

Residence: Theory

ID four approaches to determining which persons should pay tax on income

Residence - most common
Citizenship - US only
Domicile - unclear in meaning
Source - tax based on where income earned

21

Residence: Theory

Briefly describe Residence as a basis for taxation; explain the advantage and disadvantage of this approach

Residence - most common approach, practical enforcement, and mostly strong connection to country

BUT - possible taxation without representation

22

Residence: Theory

Briefly describe Citizenship as a basis for taxation. Explain the advantage and disadvantage of the approach.

Citizenship - only used by the US, allows for easier enforcement overseas and justified by benefits of citizenship

BUT - sweeps many people with only tenuous connection + easy to double-tax

23

Residence: Theory


Briefly describe Domicile as a basis for taxation. Explain the advantage and disadvantage of the approach.

Domicile is an unclear term subject to unclear court decisions; not commonly used (used mainly for estate taxes)

24

Residence: Theory

Briefly describe Source as a basis for taxation. Explain the advantage and disadvantage of the approach.

Source - could tax based on where income from, would avoid double taxation if all countries did it, easy to enforce

BUT - hard to measure ability to pay, could lead to avoidance, disconnected from benefit from country

25

Residence of INDIVIDUALS - Definition (mainly for final exam)

According to the Income Tax Folio on individual residency, how is an individual's residence status determined?

Based on the THOMSON case
Determined by considering the degree that the person is connected to the place -> person is "ordinarily resident" in place where he normally or customarily lives.

26

Residence of INDIVIDUALS - Definition (mainly for final exam)

What are the PRIMARY factors generally considered in determining individual residency?

Significant residential ties include - 1) dwelling place(es), 2) location of spouse or common-law partner, 3) dependants

27

Residence of INDIVIDUALS - Definition (mainly for final exam)

What are some other factors considered in determining individual residence?

1) personal PROPERTY in Canada, 2) SOCIAL ties, 3) ECONOMIC ties, 4) INSURANCE coverage, 5) LICENSES, 6) MEMBERSHIPS, 7) passport

28

Residence of INDIVIDUALS - Definition (mainly for final exam)

How are FOREIGN ties relevant in abandoning Canadian residency?

Ties to foreign jurisdiction are RELEVANT, but not determinative for abandoning Canadian residence b/c according to THOMSON, everyone is resident somewhere at all times.

29

Residence of INDIVIDUALS - Definition (mainly for final exam)

Thomson v MNR, 1946 SCC - what are the key points of the majority decision?

1. For purposes of income tax, EVERY person is assumed to have a residence at ALL times & may have more than one
2. It is NOT necessary for residence to have a home, place or abode
3. Residence = where person spends his or her customary living
4. The taxpayer's INTENTION is relevant, but NOT determinative

30

Residence of INDIVIDUALS - Ordinarily Resident

How has "ordinarily resident" been interpreted?

"ordinarily resident" is mostly superfluous --> Thomson v MNR, 1946 SCC

The income Tax Folio also indicates you have to COMPLETELY sever ties to cut residence