4.3.2 U.S. interpretation of the Canada U.S Tax Treaty

4.3.2  (a)  Article IV(1) Residency

Foreign persons generating income from U.S. sources are potentially subject to one, or both, of two U.S federal taxation regimes dealing with net business income, or gross income from “interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income.”

A foreign person must qualify as resident under the treaty to get the relief. A resident for purposes of the Treaty means any person who is liable to Canadian income tax by reason of that person’s domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature.

The Treaty provides certain specific definitions of a “resident”.

• The Canadian government, any political subdivision or local authority of Canada, or any agency or instrumentality of Canada or such subdivision or local authority;
• A trust, organization or other arrangement that is operated exclusively to administer or provide pension, retirement or employee benefits, organized in Canada, and that by its nature is generally exempt from Canadian income taxation;
• A not-for-profit organization, organized in Canada, and that by its nature is generally exempt from Canadian income taxation.

Article IV(1) does not specifically address the residency of partnerships. Nevertheless, because both the U.S. and Canada treat partnerships as pure conduits, the U.S. will look to the residence of the partners of the partnership for purposes of determining the availability of the benefits of the Treaty.

4.3.2  (b)  Article IV(2) Dual Resident  Individuals

Under Article IV(2) of the Treaty, where a person is considered to be a resident of both contracting states (Canada and the U.S.), he will be deemed to be a resident of the State:

• in which he has a permanent home available to him;
• if he neither has a permanent home in either States, or has a permanent home in both States, in which his personal and economic relations if closer;
• if the State in which his center of vital interest cannot be determined, in which he has an habitual abode;
• if he has an habitual abode in both or neither State, in which he is a citizen;
• if he is a citizen of both or neither State, the competent authorities shall settle the question of residency by mutual agreement.

4.3.2  [c]  Article IV(3) Dual Resident  Corporations

It is possible for a corporation to be resident in both Countries. Since the U.S treats corporations as resident in the respective jurisdictions in which they were created, whereas Canada will treat foreign corporations as Canadian resident where the management and control of such corporation is exercised in Canada, a company incorporated in the U.S. but managed and controlled from Canada would be considered to be a dual resident corporation.

It is also possible for a corporation to be considered incorporated in both countries. This can occur when a corporation is “continued” or “domesticated” into the other country under local corporate law.

4.3.2  [d]  Article IV(4) Mutual Agreement

To the extent a person, other than an individual or corporation, is considered a resident in both the U.S. and Canada by reason of paragraph 1 of Article IV, the competent authorities will, by mutual agreement, settle the issue of residency, and by extension, how the Treaty will be applied to each such person.

4.3.2  [e]  Article IV(5) Deemed Resident  Provision

Paragraph 5 of the Article IV deems an employee of the U.S. or of a political subdivision, local authority, or instrumentality of the U.S. who is rendering services in Canada or any third country in the discharge of his functions of a governmental nature, and is subject to “similar obligations” in the U.S. with regard to income taxes as other residents of the U.S., to be a resident of the U.S.

References:

Advisor’s Guide to Canada – U.S. Tax Treaty

By:  Vitaly Timokhov, Raymond Montero, David Kerzner

Published by: Thomson Carswell