Residence Tiebreakers

On August 11, 2010, the National Post posted an article about some of the US tax issues Conrad Black currently faces. The article provides an overview of how an individual may be taxed in foreign jurisdictions. The article discusses the different bases that countries use in their income tax system and the possibility that an individual or corporation could be taxed on its worldwide income in two different countries.

If an individual or corporation is a taxpayer in both countries, that taxpayer may seek relief from an available tax treaty. All tax treaties will have some form of tiebreaker so that the taxpayer will be taxed on its worldwide income in only one country. The tiebreaker rules for individuals are different from the corporate tiebreaker rules and they may vary treaty to treaty.

One commonly used tax treaty is the Canada-US Tax Treaty. According to Article IV(2) of the Canada-US Tax Treaty, the tiebreaker rules for individuals are as follows:

• The jurisdiction where the individual has a permanent home available to them;
• The jurisdiction where the individual’s personal and economic relations are closer (centre of vital interests);
• The jurisdiction where the individual’s habitual abode is located;
• The jurisdiction in which the individual is a citizen;

The tie-breaker rules apply in sequence, so if the first rule doesn’t settle the issue, one moves to the next rule. If the above rules do not break the tie, the competent authorities in each country (in this case, the Canada Revenue Agency and the IRS) will come to a mutual agreement on the individual’s residency.