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Part 2: OECD CRS: Tax Residence And The Tax Treaty Tiebreaker



John Richardson

This is Part 2 – a continuation of the post about “tax residency under the Common Reporting Standard.”

That post ended with:

Breaking tax residency to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking tax residency in Canada can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a tax resident of Canada.)

Let’s assume that our friend, without considering possible tax treaties is or may be considered to be ordinarily resident in and therefore a tax resident of Canada.

Would a consideration of possible tax treaties (specifically the tax treaty residency tiebreaker) make a difference?

What is the Tax Treaty Residency Tiebreaker?

It is entirely possible for an individual to be a tax resident according to the laws of two (or more countries). This is a disastrous situation for any individual. Fortunately with the exception of U.S. citizens (who are always tax residents of the United States no matter where they live), citizens of most other nations are able to avoid being tax residents of more than one country. This is accomplished through a tax treaty tie breaker provision. Treaty tie breakers are included in many tax treaties. (Q. Why are U.S. citizens always U.S. tax residents? A. U.S. treaties include what is called the savings clause).

Some Thoughts on the Savings Clause

First, the savings clause ensures that the United States retains the right to impose full taxation on U.S. citizens living abroad (even those who are dual citizens and reside outside the United States in their country of second citizenship).

Second, the U.S. insistence on the savings clause ensures that other countries agree to allow the United States to impose U.S. taxation on their own citizen/residents who also happen to have U.S. citizenship (generally because of a U.S. place of birth.)

Where are Tax Treaty Tie Breakers Found? What do they Typically Say?

Many countries have tax treaty tie breaker provisions in their tax treaties. The purpose is to assign tax residence to one country when a person is a tax resident of more than one country.

As explained by Wayne Bewick and Todd Trowbridge of Trowbridge Professional Corporation (writing in the context of Canadian tax treaties):

The tie breaker rules are in place to determine an individual’s country of residence for tax purposes in the case of dual residency status which then determines which country gets the first right to tax certain types of income. The rules will depend on the particular treaty but typically they apply in the following order in cases of dual residency:

An individual will be considered resident in the country where they have a permanent home available to them.

Where the individual has a permanent home available in both countries, or neither country, the individual will be considered a resident of the country where their personal and economic relations are closer (referred to as centre of vital interests).

Where the centre of vital interests cannot be determined, the individual will be considered a resident of the country where they have a habitual abode (generally where the individual spends the majority of their time).

Where the individual has a habitual abode in both countries, the individual will be considered a resident of the country where the individual is a national.

Where the individual is a national of both countries, or neither country, the individual’s residence will be determined by the competent authorities for each country.

As can be seen, based on the tie-breaker rules it is possible to become a non-resident of Canada even though the individual may still have significant ties in Canada. For example, consider a situation where a factual resident of Canada has emigrated and become a resident of the United States. If the individual only has a permanent home available in the United States, the individual would be considered resident of the United States and a deemed non-resident of Canada. Or, if the individual has a permanent home available in both countries but works full time and lives with his family in the United States, the individual would be considered a resident of the United States and a deemed non-resident of Canada.

Significantly, the Tax Treaty Tie Breaker Rules Operate so that:

– on the one hand, a person could be a tax resident of Canada; but

– on the other hand, the status of being a tax resident of Canada can be ended through the use of a tax treaty!

This has important implications in a CRS world where individuals are forced to determine and disclose all countries where they may be a tax resident!

This is a good example of how tax treaties can determine tax residence in the context of the Common Reporting Standard (CRS).

This has been Part 2 of a series of posts exploring tax residency in the context of the OECD. To answer the question posed at the end of Post 1:

Q. “Would a consideration of possible tax treaties (specifically the tax treaty residency tiebreaker) make a difference in determining tax residency?”

A. Yes, tax treaties can be used to help determine tax residence for the purpose of the the Common Reporting Standard.

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The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.