Tax Court of Canada


Income tax

Foreign income

Certain rules existed as tie-breakers within Canada-US Tax Treaty concerning residency

Taxpayer was employed in state of Massachusetts until December 2012 and still owned house there, and from and after October 31, 2009 taxpayer owned house in Nova Scotia. Sometime after April 9, 2013, taxpayer requested withdrawal of $696,309.38 (USD) from his U.S. 401(k) retirement fund and in U.S., federal and state income taxes of $139,261.88 (USD) and $36,556.24 (USD) were withheld. Taxpayer received sum of $495,325.03 sometime immediately following May 6, 2013 and made final re-entry to Canada on May 9, 2013. In his 2013 T1 tax return, taxpayer reported “net foreign business income” of $727,136.44 and claimed $265,026.30 non-business income foreign tax credit, as well as “other deductions” of $338,831.18. Minister originally denied credits and deductions but subsequently reassessed to allow foreign tax credits of $176,609.30, maintaining that taxpayer was subject to Canadian income tax. Taxpayer appealed. Appeal allowed. “Counter deeming” provisions of s. 250(5) of Income Tax Act were potentially applicable. Certain rules existed as tie-breakers within Canada-US Tax Treaty concerning residency. Period in issue was period surrounding May 6, 2013. Taxpayer’s habitual mode was in U.S. on or before May 9, 2013. As dual treaty resident, taxpayer was resident of U.S. and not Canada by virtue of application of tie-breaker rule in s. 2(b) of Article IV of Treaty and as such income from 401(k) proceeds were not taxable in Canada under Act.

Davis v. The Queen (2018), 2018 CarswellNat 2997, 2018 TCC 110, Randall S. Bocock J. (T.C.C. [General Procedure]).

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