There are various reasons why an individual might decide to give up residence in Canada; most of them are not tax driven. Canada’s tax rates are favourable compared to those in most developed countries and changes in family circumstances and business opportunities are more often the cause. But regardless of the reason for going, one question that arises, and which can be significant for income tax purposes is: when did the individual actually cease to be resident here? Whether or not an individual has given up residence at a point in time depends on the particular facts and circumstances of each case, so it is not really possible to describe a rule of thumb that will apply in all cases. But the recent Tax Court decision in MacDonald, 2012 TCC 123, provides some general guidance that taxpayers looking at a change in residence may find helpful.
The MacDonald case has attained some notoriety since its publication (April 17, 2012) because of the way the court analysed a surplus stripping argument advanced by the Crown in the context of a pipeline-like transaction. (See my blog post of June 21, 2012: “Of Gaps and GAAR” for a discussion of this aspect of the case.) I have not noted much comment on a subsidiary aspect of the case, the one relating to a residency question. The primary issue was whether amounts paid to the taxpayer for his shares in a company with very liquid investment-type assets should be taxed as capital gains (as he alleged) or as a deemed dividend under subsection 84(2) (as the Crown alleged). The residency issue arose if the distribution was taxable as a deemed dividend and was received at a time after the taxpayer ceased to be resident in Canada. The court decided in favour of the taxpayer on the main issue, so the subsidiary one was moot. Nonetheless, the court described in some detail the steps taken by the taxpayer to both establish a new residence in the United States and to give up residence in Canada at precisely 5.30 pm on June 25, 2012, and found those steps to be effective for fixing the time and date on which he ceased to be a resident.
It’s not practical to describe in this brief note all of the factors considered by the court, but the decision makes for very interesting reading on the residency issue and I recommend it to anyone wondering about the timing of a similar step. The following passage from paragraph 136 of the reasons for judgment catches the flavour of the court’s approach:
“…I accept the Appellant’s filing position as to his residence in Canada until he crossed the border on June 25, 2002. It is not without merit to allow an accepted filing position which reflects a studied sequence of events aimed at ensuring that the Appellant was a resident of Canada until he crossed the US border with an immigration permit which entitled him entry as a resident there. While such a clear line cannot always be drawn, given the preparatory efforts required for a change in residence, which require both a severance of ties to Canada and the establishment of new residential ties to another country, it may not be unreasonable in cases such as this to look to the date and time of the physical departure as the date and time of a change of residence. In this case, a finding that is that precise, as to a moment in time, is possible; it reflects and coincides with the Appellant’s mental, familial and personal detachment from Canada as the place he resided until he crossed the border… .”