In litigation involving U.S. citizen with U.S. residence
who also had Canadian residence where he spent most of his time as business
consultant, Canadian Federal Court of Appeal interprets Canada‑United States
Income Tax Convention (1980) to require that U.S. citizen should pay Canadian
taxes on his business income earned in Canada
The following involves U.S.-Canadian legal issues about a
business consultant, including taxation of business income derived from
business consulting.
Since 2000, R. H. Lingle, (Appellant), a US citizen, has
been working as a consultant in Ontario. Throughout the relevant period,
Appellant had both US and Canadian residences. Appellant’s family resided at a
US house to which he returned one weekend per month. Appellant and his spouse
separated in 2004 and sold their US house in 2006. Designating himself as a non‑resident
of Canada, Appellant filed income tax returns for 2004 and 2005 tax years on
his self‑employment business income. Appellant also filed returns in the US for
these tax years.
On his Canadian returns, however, he claimed equivalent
amounts as treaty deductions pursuant to the Canada‑United States Income Tax
Convention (1980); TIAS 11087;1469 UNTS 189 [in eff. 1984]; with amending
Protocols, 2121 UNTS 364 and 387 (in eff. 1984); 2030 UNTS 236 (in eff.1995)
and 276 (in eff. 1997) (the Convention). The Canadian Tax Minister assessed
Appellant’s Canadian income tax for 2004 during the period from January 1, 2005
to September 14, 2005. The Minister decided that Appellant was a resident of
Canada because his habitual abode lay in Canada during this period. Thus the
Convention required Appellant to pay Canadian income taxes on business earnings
in these years.
The administrative agency and the Tax Court dismissed
Appellant’s appeals. These tribunals relied upon Article IV(2) of the Treaty.
These tribunals found that that the Appellant did not have an “habitual abode”
as a business consultant in the United States under the Treaty. Mr. Lingle went
to the Federal Court of Appeal which unanimously dismisses his appeal. These
are substantial excerpts from its opinion.
Paras. 1‑2. “The Tax Court of Canada was called upon to
decide pursuant to the Convention whether the Appellant was required to pay to
Canada the income tax on his Canadian business income. The taxation years in
issue were 2004 and nine months of 2005. As between the United States and
Canada, Article IV(2) of the Convention sets out five tie‑breaker rules in both
English and French to assist in determining the jurisdiction in which the
income tax is to be paid.”
3. “ ¼ [T]he parties agreed that the Appellant had a permanent
home in both Canada and the United States during the relevant periods. They
also agreed that they could not use the second tie‑breaker as it was impossible
to determine in which country the Appellant had his ‘centre of vital
interests.’ So the matter fell to be determined on the concept of ‘habitual
abode’ found in the third tie‑breaker [see Article IV(3)]. ¼’”
4. “The Tax Court found that [Mr. Lingle] did not have an
‘habitual abode’ in the United States for the purposes of the Convention ¼I am
in substantial agreement with the findings and conclusion of the Tax Court.”
5. “The definition and interpretation of ‘habitual abode’
involves a question of law reviewable on the standard of correctness. [T]he
application of the definition to the facts of the case to determine whether the
Appellant had an ‘habitual abode’ in both jurisdictions, however, raises a
question of mixed fact and law which is immune from review by this Court unless
there is an overriding and palpable error: see Housen v. Nikolaisen, [2002] 2
S.C.R. 235 (S.C.C.). I see no such error on the facts of this case.”
6‑7. “It would be unwise to attempt to set out a rule or a
series of criteria which could fit all situations. The determination in each
case will depend on the facts and circumstances of the case. The concept of
‘habitual abode’, as evidenced by the clearer French version of the text
(séjourne de façon habituelle) involves notions of frequency, duration and
regularity of stays of a quality which are more than transient.”
“To put it differently, the concept refers to a stay of some
substance in the jurisdiction as a matter of habit, so that the conclusion can
be drawn that this is where the Appellant normally lives. This is consistent
with the French definition of ‘habituelle’ found in Le Petit Robert 2006: [1].
‘Qui tient à l’habitude par sa régularité, sa constance’. [2]. ‘Qui est
constant, ou très fréquent.’”
8. “This [interpretation] is also consistent with the
commentary on Article IV(2) of the OECD Model where it is stated that, in
comparing the stays in two States to determine if and where the individual has
an ‘habitual abode’, ‘the comparison must cover a sufficient length of time for
it to be possible to determine whether the residence in the two States is
habitual and to determine also the intervals at which the stays take place’:
see Model Tax Convention on Income and on Capital, OECD Committee on Fiscal
Affairs, vol. 1, July 2008, at page C(4)‑6.”
9. “In ¼ his memorandum of fact and law and at the hearing, the
Appellant submitted that the Tax Court judge applied the wrong test in that she
went on to examine the social and economic ties which he had in Canada and the
United States during the relevant periods. In doing so, she confused the second
and the third tie‑breaker. He finds evidence of the judge’s error in the
following sentence ¼
of the judge’s reasons for judgment: ‘Considering all the facts before me, his
connections with the United States were weak when compared to his settled
routine in Canada.’”
10. “This sentence is taken out of context and read in
isolation. When the sentence is replaced in its proper context, the Appellant’s
argument simply has no merit. What the judge was saying in that sentence is
that the Appellant did not have a settled routine in the United States while he
had one in Canada which showed that he did regularly, customarily or normally
live in Canada.”
11. “The judge’s impugned sentence ¼ [lay in ] her reasons for
judgment [as excerpted here]: ‘¼In the settled routine of [Appellant’s] life ‘he
regularly, normally and customarily lived as a business consultant in Canada.’
He did not have any other contracts, clients or business in the USA. In
addition, he spent only 69 days out of 623 days in the relevant period at his
home in the United States. It is interesting that these agreed statements
explicitly state that the Appellant ‘normally ... lived as a business
consultant in Canada’ ¼ He did not have an habitual abode in the United States
for the purposes of the Treaty because he did not regularly, customarily or
normally live in the United States. Considering all the facts before me, his
connections with the United States were weak when compared to his settled
routine in Canada. Accordingly, the Appellant was a resident in Canada during
this period and as such he is taxable on his business income earned as a
consultant.’”
12. “To the extent that the [Tax Court’s] sentence per se
could be found to be ambiguous, it is, however, clear from a reading of the
reasons as a whole ¼
that, at the point where the sentence occurs, the judge had already concluded
that the Appellant did not have an ‘habitual abode’ in the United States
‘because he did not regularly, customarily or normally live in the United
States.’¼”
13. “The [Appellant] argued that the proper test to be
applied for determining where a taxpayer has his ‘habitual abode’ is to look at
where he or she ‘is habitually present’. He relies upon a tentative conclusion
of Dr. J.F. Avery Jones who, the [Appellant] says, is currently a judge on the
United Kingdom First Tier Tax Tribunal. In a paper presented at the Fifth
Annual International Taxation Symposium in the United States, Dr. Avery Jones
reviewed the elusive concept of ‘habitual abode’ and concluded: ‘Perhaps an
habitual abode really means ‘is habitually present’, which would be much
clearer.’”
14,15. “The Tax Court found that the [Appellant] ‘regularly,
normally and customarily lived as a business consultant in Canada’: ... By the
[Appellant’s] proposed test, the Tax Court found that he was habitually present
in Canada, but not in the United States. For these reasons, I would dismiss the
appeal with costs.” [The other two judges being in agreement, “the appeal is
dismissed.”]
Citation: Lingle v. Regina, 2010 Carswell Nat. 1605;
2010 FCA 152; 2010 D.T.C. 5100 (Eng.); [2010] 5 C.T.C. 162; 403 N.R. 337 (Can.
Fed. Ct. App. 2010).
*** Richard Kranitz, attorney in Wisconsin
