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April 16, 2024

Tax Tips

Residency Test - Allchin Revisited
Subject: Residency
Number: 05-19
Date: 7/25/2005
Tax Court forced to take a second look at this case

The Federal Court of Appeal concluded that the Tax Court should have considered that Miss Allchin was a resident of the U.S. They sent the case back to the Tax Court to be heard by a different judge, to analyze the tiebreaker rules in the Canada-US Tax Convention. The Tax Court reheard the case, with some more evidence and allowed the appeal(2005 DTC 603). The Tax Court rehearing began with the assumption that the taxpayer was a resident of both Canada and the U.S. in accordance with the Federal Court of Appeal decision.

The judge reviewed the tiebreaker rules in Article IV (2) of the Canada-U.S. Tax Convention. The first test is that a taxpayer is resident in the state in which he had a permanent home available to him. In this case, the taxpayer owned a house in Windsor, and lived in a cousin's home and in a friend's condominium in Michigan in the years in question. She intended that her family would move to Michigan shortly after she started work in the U.S. The Court determined that the taxpayer had a permanent home in both Canada and the U.S. or in neither.

The second test under the tiebreaker rules is the location of the taxpayer's centre of vital interests. The Court determined that the taxpayer's economic activities were in the U.S., while her personal relations were in Canada. The Court held that a determination could not be made under the second test.

The third test is whether the taxpayer had an "habitual abode" in one of the countries. The judge made a detailed analysis of the words "habitual abode." He graphed the number of days spent by the taxpayer in each of Canada and the U.S., based on evidence given by Ms. Allchin at the first hearing, and made a determination that the taxpayer's habitual abode was in the U.S. This led to the conclusion that the taxpayer was not taxable in Canada and was only taxable in the U.S.

The analysis prepared by the Court should be helpful in future determinations of where an individual is resident when a tax treaty applies. However, the facts always determine where an individual is resident.

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