CHAPTER 2

Liability for Tax

Problem 1 (Basic)
For each of the following individuals, determine and explain the type of residency for tax purposes for 2008. (a) Anthony entered Canada on March 1, 2008, and worked as a domestic on a southern Saskatchewan ranch for the remainder of the year. On December 15, 2008, Anthony's wife moved to Canada with their three children and all of their belongings. They plan to stay permanently in Canada.

(b) Lubie lived in Detroit throughout 2008 but was a full-time employee in Windsor. She also invested
heavily and traded large volumes of shares and bonds in her own stock account in Windsor. (c) Ephran, a computer programmer with Xion Corporation in Toronto, accepted a transfer to Silicon Valley, California. On May 1, 2008, he flew to California and began work on the same day. Most of his belongings remained in Toronto until July 30, 2008. His common-law spouse waited until this day, when the house was sold, the bank accounts were closed, and her contract with the Toronto Public School Board was fulfilled.

(d) Julia, a citizen of the United States, lived with her parents in Canada from September 1, 2007 to
April 30, 2008 to attend the University of Alberta. On May 1, she accepted an employment position as a mountain bike guide in Colorado and resided there until August 30, 2008. Then she returned to Edmonton to complete her commerce degree. On January 1, 2009, Julia began her employment with a public accounting firm in Canada.

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12 Solution 1 (Basic)

Introduction to Federal Income Taxation in Canada: Fundamentals

(a) As Anthony has made a fresh start in Canada on March 1, 2008, he is considered a part-year resident. Accordingly, he will be taxed on his worldwide income from March 1 to December 31. Prior to March 1, he would only pay tax on income from Canadian sources. (b) Lubie has a continuing state of relationship with Canada. In particular, all of her income is earned in Canada and she crosses the border each day. She also carries on active trading in Canada as well. All of the facts support that Lubie has a continuing state of relationship with Canada; therefore, she is a resident in Canada for tax purposes. The 183-day sojourner rule would not apply because Lubie does not stay overnight. She will also be taxed in the United States; therefore, she will have to apply for a foreign tax credit on her U.S. return. (c) AlthoughEphran spent over 183 days in Canada before severing all of his ties, he is still considered a partyear resident. This is because he made a clean break from Canada and does not plan to return. Accordingly, he will be taxed on his worldwide income from January 1 to July 30, 2008. After July 30, he will only be taxed on income from Canadian sources. (An argument could also be made that Ephran made a clean break from Canada on May 1, 2008.) (d) Julia has a strong continuing state of relationship with Canada even though she is a U.S. citizen. Accordingly, she will be considered a resident of Canada and taxed on her worldwide income. Citizenship is irrelevant to a persons resident status in Canada, but Julia will also be taxable in the United States. Consequently, Julia will be taxed in both Canada and the United States and will need to apply for a foreign tax credit.

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Problem 2 (Advanced)
[ITA: 2, 114, 250; IT-221R3] The client was born and raised in Canada. After obtaining his MBA in 1968, he began working as a consultant. In July 1976, the corporation of which he was a major shareholder entered into a contract with a Canadian Crown corporation to furnish consulting advice in Nigeria. Services were to commence July 15, 1976 and end January 14, 1978. A daily rate of fees was set, but total billings were not to exceed a specified maximum. The contract also provided for moving, travel and living expenses for the client and his dependants up to a specified maximum. All fees and expenses were paid to the clients corporation in Toronto. He continued to be a shareholder, director and officer of the corporation and he remained very interested in its activities. The corporation paid the client and was instructed to deposit these payments in the clients Canadian bank account which he continued to maintain for this purpose and for the operation of the rental property that he owned. He felt that the Canadian bank account was necessary because of foreign exchange difficulties that he might otherwise encounter. He instructed the corporation not to withhold any income taxes on these payments because he intended to give up his Canadian residence status to establish an international consulting business abroad upon termination of the Nigerian contract. Since the client had little time before leaving for Nigeria, he quickly rented the unit that he had been occupying in a duplex that he owned, on a month-to-month basis. He intended to sell the property when the market would provide him with a reasonable profit. He arranged to have his corporation manage the renting of this property for a fee which he paid to the corporation. He stored his major furnishings and winter clothing in Canada. His smaller household and personal effects were shipped to Nigeria. He sold his car, cancelled his auto insurance and a gasoline company credit card and obtained an international drivers licence. He retained credit cards such as American Express, Visa and MasterCard, as well as his RRSP accounts. Under the contract he was also required to maintain his provincial health insurance coverage. When he left Canada for Nigeria, he was accompanied by his friend, Martha, who had been a part of his life for over a year before their departure. She had obtained leave from her university program of studies for the fall 1976 term. The couple took up residence in a hotel suite that was converted into an apartment at the Holiday Inn in Lagos, Nigeria. No conventional living quarters were available, because of the housing market. During his stay in Nigeria, the client obtained a Nigerian drivers licence and maintained two bank accounts and two cars. He joined sports, dining and social clubs in Lagos. He was provided with an office by the Nigerian government and he carried business cards which identified him as a consultant with that government. He promoted the consulting business of his Toronto corporation actively in Nigeria in the hope of establishing the business abroad, but he did not generate sufficient business to stay in Nigeria beyond the period of the existing contract. He did not seek to extend his visa or pay any form of tax on his income in Nigeria. Martha returned to Canada for the winter 1977 term, and then returned to Nigeria for the summer of 1977, but returned again to Canada in September 1977 to begin a new program. By December 1977 the client had billed the limit under the contract. He vacated his apartment, sold his cars, packed up his possessions, including some artwork, textiles and other souvenirs that he had acquired, and returned to Canada. REQUIRED Prepare a memo for the tax person in your firm who will advise the client on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation. Discuss each possible degree of residence and its tax consequences. State your conclusions on the case after weighing the significance of the facts considered.

14 Solution 2 (Advanced)

Introduction to Federal Income Taxation in Canada: Fundamentals

[Reference: Glow v. The Queen, 92 DTC 6467 (F.C.T.D.)] (A) Full-time resident: taxed in Canada on worldwide income for the whole year; Criterion: continuing state of relationship with Canada; i.e., ties; Evidence: born, raised and educated in Canada, agreed to short-term contract abroad, contract provided for living expenses, indicating the temporary nature of the stay abroad, fees under the contract were paid to the clients Canadian corporation, he continued as a shareholder, director and officer of the Canadian corporation, he maintained an interest in the activities of the Canadian corporation, he maintained a Canadian bank account, he owned a rental property in Canada, he arranged a rental on a month-to-month basis to allow him to resume his habitation of the residence on short notice, he stored his major furnishings and winter clothing in Canada, indicating an intention to return, he retained credit cards issued in Canada and his RRSP accounts, he maintained his health coverage in Canada, he did not extend his visa in Nigeria, indicating an intention to return, he did not pay income tax in Nigeria, indicating a lack of permanence in his stay there, his girlfriend returned to Canada, spending only a fall term and a summer in Nigeria with him, indicating a lack of permanence in his stay, he returned to Canada, leaving nothing in Nigeria. (B) Deemed full-time resident of Canada: taxed in Canada on worldwide income for the whole year; Criterion: sojourned in Canada for an aggregate of 183 days or more in the year [par. 250(1)(a)]; Evidence: when he was in Canada until July 1976, he was not sojourning, despite being in Canada more than 183 days in that year, therefore, deemed residence is not a possibility in this particular case for 1976. (C) Part-time resident in 1976: taxed in Canada on worldwide income for the part of the year while resident; Criterion: clean break, i.e., severed ties in July 1976; Evidence: the Canadian bank account was only to avoid foreign exchange difficulties and to maintain his rental property, no withholding of income tax on his fees, he intended to establish an international consulting business abroad and to that end attempted to promote such a business in Nigeria, he intended to sell his rental property in Canada when market conditions were right and to this end he arranged a rental on a month-to-month basis to facilitate a sale, he moved his personal effects to Nigeria, he sold his car, he cancelled his auto insurance and a gasoline company credit card, he was accompanied to Nigeria by his girlfriend who stayed with him when not in school, he rented an apartment in Nigeria because more permanent accommodation was not available, he obtained a Nigerian drivers licence, he maintained two bank accounts and cars in Nigeria, he joined clubs in Nigeria, he had an office in Nigeria,

Solutions to Chapter 2 Assignment Problems

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his business cards identified him as a consultant to the Nigerian government, the credit cards he kept could be used internationally, he maintained his health coverage in Canada only because it was a requirement of his contract. (D) Non-resident: taxed in Canada on Canadian-source income; Criterion: employed in Canada, i.e., performed services of employment in Canada; Evidence: after leaving in July 1976, he was not providing services of employment in Canada, therefore, non-resident taxable in Canada is not a possibility in this case. (E) Conclusion: while the client stated an intention to establish residence abroad, he was not successful in doing so: in fact, he returned immediately at the termination of a short-term contract, he did not sever his major ties to Canada or establish strong ties abroad, his ties to Nigeria were merely those necessary to sustain a lifestyle while there; OR on the other hand, it could be argued that he made an effort to establish a consulting practice abroad and the lack of business was unforeseen and beyond his control, he attempted to integrate himself into Nigerian society by living there and joining clubs, his lack of more permanent housing was due to market conditions beyond his control.

16 Problem 3 (Advanced)

Introduction to Federal Income Taxation in Canada: Fundamentals

[ITA: 2, 114, 250; IT-221R3] The client is an electronic engineer. He was born in Erith, England, on the 7th day of July 1946. During the relevant times the client held a valid passport for the United Kingdom of Great Britain and Northern Ireland. The passport declares him a British subject with a residence in the United Kingdom with the right of abode therein. The passport was issued on September 26, 1978 for a 10-year period. Prior to the clients second marriage in 1981, his parents maintained a bedroom for him in Kent, England. In 1981, the client married Cathy, a Canadian citizen residing in Canada who had no income of her own and was wholly dependent on the client. She has always resided continuously in Canada. In June of 1981, a house near Apsley, Ontario, was purchased by Cathy with money supplied by the client. In September of 1982, Cathy borrowed money by way of a mortgage. The client guaranteed the mortgage which has an affidavit attached dated September 13, 1982 where he swore that he was not then a non-resident of Canada. For a purchase of property in Ontario, he would otherwise have had to pay a 20% non-resident land transfer tax. During the three-year period at issue in this case, 1981 to 1983, the client regularly returned to Canada when not working. Each time the client entered Canada, his passport was stamped by Immigration Canada with the majority of the entries setting out a date upon which he must leave Canada. The authorized period of stay varied from five days to 45 days. On some of the stamps the word visitor was written in by an immigration official. Throughout the three-year period, the client was employed full-time by a non-resident corporation and all work was performed outside Canada on an oil rig at sea. All income was deposited directly into a Canadian bank. The client indicated that he was charged in Provincial Court for failure to file an income tax return for 1981 and was acquitted (likely on the basis that he was not required to file in Canada for that year). During the three-year period, the client indicated or claimed that he: (a) never filed a tax return or paid income tax anywhere; (b) was not allowed to work in Canada; (c) was given a fixed date to leave Canada on entry (i.e., not allowed to stay in Canada); (d) could not join OHIP, pay El, maintain an RRSP or join a pension plan; (e) was out of the country more than 183 days per year; (f) had no desire to work in Canada; (g) had a residence in Britain in the home of his mother and father; (h) held a mortgage in Britain on his first wifes house; (i) could not live a normal life in Canada as he had to leave every 27 days; and (j) had a bank account with the Royal Bank of Canada both in Canada and the Caribbean. In 1984, the client purchased a car in Canada. In 1985, the client: (a) obtained a Canadian drivers licence; (b) obtained a Canadian visa; and (c) became a landed immigrant in Canada. REQUIRED Prepare a memo for the tax person in your firm who will advise the client on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation for the period in question. Discuss each degree of residence and its tax consequences as it applies to this fact situation. Note that in this case full-time residence under the common law principle could only result from a fresh start at a point in time in the period in question. Therefore, part-time residence would depend on there being a period of non-residence prior to a fresh start, if any. State your conclusion on this case after appropriately weighing the significance of the facts considered. Your conclusion should indicate whether the client became a full-time resident at any point in the period or remained a non-resident throughout the period. If you conclude that he became a full-time resident, indicate the point in time when the fresh start was made.

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Solution 3 (Advanced)
[Reference: Lee v. M.N.R., 90 DTC 1014 (T.C.C.)] (A) Full-time resident of Canada after a fresh start: taxed in Canada on worldwide income for the whole year; Criterion: a continuing state of relationship, i.e., continuing ties with Canada after a fresh start; Evidence of residence: although U.K. passport indicated residence in U.K., can be resident in more than one place, room in parents house maintained for his use before his marriage, but not likely after that time, married in Canada to a person who continued to reside in Canada, supported his wife who was wholly dependent on him in Canada, his wife bought a house in Canada with funds which he provided, house mortgaged in Canada with a guarantee provided by the client, he provided an affidavit with the mortgage in which he swore that he was not a non-resident, he regularly returned to Canada length of stay is not determining (see Thomson case), the use of the term visitor by immigration officials does not mean that the term is applied with the same meaning under the Act, income from his employment was deposited to a Canadian bank account, he never filed or paid income tax anywhere it must be assumed that every person has at all times a residence (see Thomson case), the mortgage on his first wifes house in Britain and the Caribbean bank account may have been simply a foreign investment of a resident of Canada, after the period in question, i.e., 1981 to 1983 he purchased a car, he obtained a Canadian drivers licence, he obtained a Canadian visa, he became a landed immigrant. (B) Deemed full-time resident of Canada for the years in question: taxed in Canada on worldwide income for the whole year; Criterion: sojourned in Canada for an aggregate of 183 days or more in a year [par. 250(1)(a)]; Evidence: he may have been sojourning when he regularly returned to Canada, but he was out of the country more than 183 days per year. (C) Part-time resident in Canada after a fresh start and not resident before that time: taxed on worldwide income for the part of the year after the fresh start; Criterion: fresh start preceded by a period of non-residence; Evidence of non-residence: history in England, U.K. passport held throughout the period in question passport indicates residence in U.K., parents maintain a room in England available for his use at any time, affidavit on which he swore that he was not a non-resident was not for income tax purposes but for Ontario land transfer tax, the concept of a non-resident for the transfer tax may differ from that for income tax, on his entry to Canada, the length of his stay was limited by the setting of a date for his departure, immigration officials considered him to be a visitor on stamping his passport, he was employed on a full-time basis outside of Canada he indicated that he did not want to work in Canada,

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Introduction to Federal Income Taxation in Canada: Fundamentals

he was acquitted of failure to file a 1981 tax return in Canada, likely because he was not required to file, he was not allowed to work in Canada, he could not join OHIP, pay El, maintain an RRSP or join a pension plan in Canada, he held a mortgage in Britain on his first wifes house, he had a bank account in the Caribbean, the bank account in Canada may have been for convenience or an investment like any other that a nonresident might make in Canada. (D) Non-resident throughout the period in question: taxed on Canadian-source income; Criterion: employed or carried on business in Canada; Evidence: during the period in question he was neither employed nor carried on business in Canada. (E) Conclusion: he cannot be deemed a full-time resident, because he does not meet the criterion, if he is held to be a non-resident throughout the period in question, he will not be taxable in Canada because he has no Canadian-source income, therefore, either he made a fresh start at some point in the period or he was a non-resident throughout the period, his ties to Canada appear to have begun with his marriage in June of 1981 and the subsequent purchase of a matrimonial home to which he returned regularly, at least, he could be considered to have become a resident in September of 1982 when he swore that he was not a non-resident. Note: A conclusion for non-resident is acceptable, if an argument for a weighing of the facts in that direction is presented.

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Problem 4 (Advanced)
[ITA: 2, 114, 250; IT-221R3] The client is a mechanical engineer, born and educated in England. The client was married in England in 1962, and he and his wife, Dawning, had three sons born in 1964, 1966 and 1969. In 1967, the client and his wife and family moved to Canada where he immediately commenced employment with Imperial Oil in Sarnia, Ontario. With Imperial Oil and/or its parent corporation, Exxon Corporation, the client and his family moved to various locations throughout Canada until 1988. In 1988, while residing and working in Edmonton, Alberta, the client was offered the position as deputy manager of the Exxon refinery at Port Dickson in Malaysia. He accepted the position because it presented the opportunity to likely become manager of this same refinery within a three-year period. At the time of his acceptance of the above position, the client and his wife were experiencing marriage difficulties. As a result of these difficulties, it was mutually agreed that the client would go to Malaysia on his own. His wife and youngest son remained in the family home in Edmonton. His older sons were living on their own by this time. The client and his employer undertook the following steps in preparation for his move from Canada: his employer obtained a work permit for him in Malaysia; he sold his car; he cancelled his provincial health plan; his employer obtained private health insurance for him; he closed all of his existing bank accounts at Royal Bank; he opened a savings account at the Bank of Nova Scotia because this bank had a branch in Kuala Lumpur, the capital of Malaysia; he allowed his membership in the Edmonton Petroleum Club to lapse; and he allowed his participation in the Model Guided Plane Association to lapse. The client moved to Malaysia in the last few days of September 1988. He stayed in a hotel in Malaysia for the first few weeks and then moved into a company-provided home. His employer charged him with a monthly rent of $1,000 for his use of this house. He took the following items with him from Canada to Malaysia: all of his clothes and personal effects; and an airplane kit for model guided planes and a radio control transmitter for his hobby of model guided planes. Once in Malaysia, the client undertook to establish Port Dickson as his home. To this end, he: purchased a car; obtained a Malaysian drivers licence; joined the Port Dickson yacht club which was, in fact, a social/recreational club; joined the petroleum club at Kuala Lumpur; opened a chequing account at the Bank of Nova Scotia in Kuala Lumpur; opened a chequing account at the Standard Chartered Bank at Port Dickson; acquired two Malaysian credit cards; became a patient at a Port Dickson medical clinic and, as well, made regular visits to a dentist in Port Dickson; and joined the Port Dickson Golf Club in 1991. In accordance with Exxon corporate policy, the client remained on the payroll and in the pension plan of the Canadian subsidiary. His monthly pay was deposited into his Edmonton bank account. There was no income tax withheld at source on the clients salary because the Canadian subsidiary knew that he was working full-time outside of Canada. The total cost of his salary and related benefits (including pension) were charged by the Canadian subsidiary to Exxon Corporation International. The client made only two visits to Canada during the period from 1989 through 1994. He visited for 14 days in 1990 and 14 days again in 1992. On each of these visits, he stayed in the family home in Edmonton. During the same period, the clients spouse made eight visits to him in Malaysia. She made no visits after January 1992, but prior to that time, the length of her visits ranged from 19 days to 32 days. On each of these visits, she stayed with the client in his Malaysian home. The client and his wife remained married throughout the relevant period. The client maintained the following Canadian investments while he was residing in Malaysia:

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Introduction to Federal Income Taxation in Canada: Fundamentals

his 50% interest in the family home in Edmonton; a 50% investment in a rental property which his wife purchased after his move to Malaysia, because she thought it would be a good investment; his RRSP; his company savings plan; and a few personal shares in Canadian public companies. He did maintain his memberships in the Canadian Society of Mechanical Engineers and the Association of Professional Engineers and Geologists of Alberta. The client became manager of the Port Dickson plant in 1991 and eventually retired from Exxon in the summer of 1995 under the terms of an early retirement package. Upon retirement from Exxon, the client returned to Edmonton to the family home. In late 1995 the client started seeking employment in Malaysia and in January 1996 he and his wife went to Malaysia hoping that he would find employment and they would both live there. His wife returned to Canada in February 1996 and he moved on to Thailand where he stayed through July 1997 (working for the 12-month period from August 1996 through July 1997). When the Thailand employment ended, the client returned to Canada. He and his wife then worked out a plan of separation. REQUIRED Prepare a memo for the tax person in your firm who will advise the client on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation for the period October 1, 1988 through the summer of 1995. Discuss each possible degree of residence and its tax consequences. State your conclusions on this case after weighing the relevance of the facts you have considered.

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Solution 4 (Advanced)
[Reference: Dale Boston v. The Queen, 98 DTC 1124 (T.C.C.)] (A) Full-time resident of Canada: taxed in Canada on worldwide income for the whole year(s) in question; Criterion: a continuing state of relationship, i.e., continuing ties with Canada Evidence of residence: during the entire period in question his wife and 3 children (including one minor child) remained in Canada; he had the family home in Edmonton available to him throughout the entire period in question as his wife and youngest son continued to reside in this home; he remained on the payroll of the Canadian subsidiary of Exxon; his monthly pay was deposited into his Edmonton bank account; he remained a member of the pension plan of the Canadian subsidiary of Exxon; he did maintain some Canadian investments: his 50% interest in the family home in Edmonton, a 50% investment in rental property which his wife purchased after his move to Malaysia because she thought it would be a good investment, his RRSP, his company savings plan, and a few personal shares in Canadian public companies. (B) Deemed full-time resident of Canada for the years in question: taxed in Canada on worldwide income for the whole year(s) in question; Criterion: sojourned in Canada for an aggregate of 183 days or more in a year [par. 250(1)(a)] Evidence: he may have been sojourning when he came to Canada for brief periods during 1990 and 1992; but in neither of these years did he sojourn for a period in aggregate of 183 days; visits were 14 days in each of 1990 and 1992 and no days during 1989 and 1991, 1993 and 1994 and 1995 prior to his return during the summer. (C) Part-time resident in Canada in year of clean break or resident before the time: taxed on worldwide income for the part of the year prior to the clean break. Criterion: clean break, i.e., severed ties in September 1988 Evidence: his employer obtained a work permit for him in Malaysia; he sold his car in Canada; he cancelled his Canadian provincial health plan; his employer obtained private health insurance for him; he closed all of his existing bank accounts at the Royal Bank; he opened a savings account at the Bank of Nova Scotia because this bank had a branch in Kuala Lumpur, the capital of Malaysia; although he was paid by the Canadian subsidiary of Exxon, the cost of his pay was transferred from the Canadian subsidiary to Exxon International; no Canadian income taxes were withheld at source on his salary; he allowed his membership in the Edmonton Petroleum Club to lapse; he allowed his participation in the Model Guided Plane Association to lapse; although his wife remained in Canada, their marriage was unstable throughout the period in question and thus her presence in Canada cannot be considered a strong tie; he was employed in Malaysia in a senior managerial capacity; he hoped to stay on after the initial three years and in fact did remain for close to another four years;

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Introduction to Federal Income Taxation in Canada: Fundamentals

he maintained a dwelling in Malaysia in which he slept, took his meals, and kept his personal effects; he joined the local Malaysian yacht club; he opened Malaysian bank accounts and obtained local Malaysian credit cards; he purchased a car in Malaysia and obtained a Malaysian drivers licence; he did not come back to Canada at all in 1989 or 1991 or for the period 1993 through the summer of 1995; he returned only briefly during 1990 and 1992. (D) Non-resident throughout the period in question: taxed on Canadian-source income; Criterion: employed or carried on business in Canada Evidence: during the period in question, he was neither employed nor carried on business in Canada; although his pay was from a Canadian subsidiary of Exxon, his employment was outside of Canada. (E) Conclusion: he cannot be a deemed full-time resident, because he does not meet the 183-day criterion; if he is held to be non-resident throughout the period in question, he will not be taxable in Canada because he has no Canadian-source income; therefore, either he made a clean break at some point or he was a full-time resident throughout the period; his ties to Canada quite clearly appear to have been severed in September 1988 when he moved to Malaysia to commence his new position; he may have re-established ties to Canada in the summer of 1995 when he retired from Exxon and returned to Canada or in July 1997 when his employment in Thailand ended; for the period from September 1988 through the summer of 1995 he appears to have been a nonresident of Canada.

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Problem 5 (Basic)
For each of the following corporations, determine and explain the type of residency, for tax purposes for 2008. (a) ABI, incorporated in Montreal, Quebec, in 1979, carries on a clothing manufacturing business in Hong Kong. All directors' meetings and staff meetings are held in Hawaii, United States, each year. (b) Nickel Company, incorporated in the Bahamas in 1966, operates a mining business in Northern Ontario. All profits are paid out as dividends directly into a Swiss bank account. All books and records are maintained in the president's office in Ontario. The company directors all live in Toronto and meet monthly for their directors' meeting. (c) Saffron Ltd. is a 40% subsidiary of a Canadian corporation located in Houston, Texas. The products manufactured by Saffron are sold directly to the Canadian market. No revenues are earned from U.S. sales.

24 Solution 5 (Basic)

Introduction to Federal Income Taxation in Canada: Fundamentals

(a) Since ABI is incorporated in Canada after 1965, the company will be taxed on its worldwide income throughout the fiscal year regardless of where its operations and control occur. (b) Even though Nickel Company is incorporated outside of Canada, the facts indicate that the corporations mind and management reside in Canada. The fact that all of the directors and the president live in Canada, maintain all of the books and records in Ontario, and meet in Toronto for their monthly directors meetings, clearly indicates the mind and management of the corporation is in Canada. Accordingly, it will be taxed on its worldwide income throughout the year. (c) Saffron Ltd. is considered a resident of the United States for tax purposes. The corporation would be taxable in the United States. Since the sales are direct, and no branch exists in Canada, the corporation is not subject to any income tax in Canada.

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Problem 6 (Basic)
[ITA: 2, 250, 253] Far Eastern Airlines is a company incorporated in Korea in 1974. Its general manager and other active officers of the company are resident in Korea and have their offices there. The directors and corporate officers of the company live in Korea as well. During the year in question, its sole business was operating an international airline which had no landing rights in Canada. However, in that year it had raised capital on the Canadian market for its international operations by selling an issue of its stock through an investment dealer in Vancouver. The vice-president finance of the company, who believed the stock issue would sell better in Canada, travelled from the head office in Korea to Vancouver to instruct the investment dealer. The stock issue was highly successful and the proceeds of the issue were accumulated in a bank account in Vancouver. During the several months in the year in question when these funds were being accumulated, the company became aware of an opportunity to purchase a vast quantity of aviation fuel at a very low price. A purchasing agent was dispatched from the head office in Korea to Canada to complete the purchase using some of the funds accumulated from the stock issue. The fuel was stored in Canada temporarily in rented facilities pending shipment to San Francisco, where it could be used by aircraft landing there. Subsequently, the company was unable to make suitable arrangements for shipment. The fuel was sold to a Canadian buyer at a considerable profit. All contracts involved in the purchase and sale transactions were drawn up by a Canadian lawyer under the direction of the purchasing agent who operated from a hotel room in Vancouver during the period of the transactions. REQUIRED Prepare a memo for the tax person in your firm who will advise Far Eastern Airlines on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation. Discuss each possible degree of residence and its tax consequences. State your conclusions on the case after considering the relevant international tax agreement and after appropriately weighing the significance of the facts considered.

26 Solution 6 (Basic)

Introduction to Federal Income Taxation in Canada: Fundamentals

(A) Full-time residence taxed on worldwide income: (i) where central management and control actually abides, central management and control in Korea, general manager and other active officers live in Korea and have their offices there, directors live in Korea; (ii) on the other hand, company had a bank account in Canada, company used the services of a Canadian investment dealer and a Canadian lawyer, purchase and sale transactions were made in Canada. (B) Deemed residence under subsection 250(4) taxed on worldwide income: (i) must be incorporated in Canada, cannot be deemed resident because incorporated in United States. (C) Non-resident taxed only on Canadian-source income [par. 2(3)(b)]: (i) must carry on business in Canada, 1. definition of business includes an undertaking of any kind whatever and an adventure in the nature of trade [ssec. 248(1)], purchase and sale of aviation fuel could be an adventure in the nature of trade; 2. definition of carrying on a business includes offering anything for sale in Canada [par. 253(b)], sale of shares and aviation fuel would both be included in the extended meaning of carrying on of business in Canada; 3. in the Tara case, the Court stated that an adventure in the nature of trade does not in itself constitute carrying on a business in Canada within the meaning of the words carrying on business (see also IT-459, par. 3), the transaction could be considered to be part of the larger activity and, therefore not an isolated transaction; the purchase of fuel was part of the usual business that it was actively carrying on to carry on something involves continuity of time or operations as contemplated in the ordinary sense of a business; the purchase transaction in question was one of many of that nature over time the activities must be engaged in on a continuing basis, rather than as an isolated transaction to fall within paragraph 253(b). (D) Effect of CanadaKorea Income Tax Convention possible exemption from tax: (i) business profits not earned from a permanent establishment in Canada are not taxed in Canada, 1. even if considered to be carrying on a business in Canada, insufficient evidence to substantiate a permanent establishment as defined in Article 5, nothing more than a bank account, temporarily rented storage facilities, and arrangements with an investment dealer and a lawyer. (E) Conclusion: (i) not resident in Canada because central management and control appear to be in Korea, (ii) it may be considered to have carried on business in Canada, however, the tax that would otherwise be paid from the carrying on of business is exempted by the CanadaKorea Income Tax Convention, because it did not carry on business through a permanent establishment in Canada.

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Problem 7 (Advanced)
[ITA: 2, 250, 253] Wong Computer Games Inc. (WCG) was incorporated in the state of Illinois in the last decade. The founding shareholder, Mr. Andrew Wong, is an inventor of computer simulation models. His products include a wide variety of computer games as well as some programs which have industrial applications. Mr. Wong is the controlling shareholder of WCG. His brother owns a minority interest, as does Walter Bends, a long-time associate of Mr. Wong, who often collaborates in the development of new products. All three shareholders are resident in Chicago. In addition to Mr. Wong, the WCG Board of Directors includes George Wolf, who represents the Chicago law firm, which advises WCG, and Tony Aster who represents First National Bank of Chicago, which provides most of the financing for WCGs operations. The Board meets approximately every six months to review financial results, discuss product development and decide on strategic initiatives. The meetings are usually held in the boardroom of George Wolfs law firm. Two years ago, Mr. Wong achieved an industry breakthrough when he developed his latest game, SuperPilot. SuperPilot is a computer game in which the operator attempts to safely land a disabled airliner. SuperPilot provided special effects which were far beyond those available in any other commercially available product. Although other WCG products were only available in the U.S. market, Wong was convinced that SuperPilot would be a global success. To ensure the competitive advantage would be maintained, Wong Computer Games Inc. took the required legal steps to ensure copyright and patent protection of the program in a variety of countries, including Canada. By last year, SuperPilot was doing very well in the U.S. market and WCG began to launch the product in other markets. Walter Bends was assigned responsibility for the Canadian market and took a short-term lease on a Toronto apartment in March of last year. WCG established a bank account with a Toronto branch of a Canadian bank. This account was to be used by Bends for promotional expenses and other incidentals. All other expenses, including Bends salary, continued to be paid from Chicago. Bends attended a number of Canadian trade shows, exhibiting the SuperPilot program. Prospective purchasers were provided with SuperPilot game cartridges as a promotional item. Bends was given the authority to sign supply contracts which would permit the purchaser a one-month supply of cartridges. At the end of the one month, if the distributor was still interested, a longer-term supply contract would be required. Bends was not permitted, however, to sign any of these long-term agreements without receiving prior approval from the WCG Board. All game cartridges, including promotional cartridges, were supplied from Chicago. If the product began to sell well in Canada, the WCG Board had discussed establishing a Canadian warehouse. By January of this year, it became obvious that SuperPilot was not going to be a Canadian success. No distributors had requested a long-term supply contract and only one, Petes Gaming Emporium, had agreed to stock the product for one month. At the end of the month, sales had been so slow that Petes was not interested in continuing the relationship. Bends returned to Chicago, the bank account was closed, and WCG refocused its marketing efforts on the U.S. market. REQUIRED Prepare a memo for the tax person in your firm who will advise WCG on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation during last year and this year. Discuss each possible degree of residence and its tax consequences and by stating your conclusions on the case after appropriately weighing the significance of the facts considered.

28 Solution 7 (Advanced)

Introduction to Federal Income Taxation in Canada: Fundamentals

(A) Full-time residence Taxed on worldwide income: where central management and control abides; central management and control abides in the U.S.; controlling shareholder, Board of Directors in the U.S.; U.S. is major market; Canada is incidental; on the other hand; company had a bank account in Canada; had an employee in Canada; short-term supply contracts made in Canada; but contracts more promotional; longer-term contracts required U.S. approval. (B) Deemed residence Taxed on worldwide income [ssec. 250(4)]: must be incorporated in Canada; WCG incorporated in the U.S.; therefore, cannot be deemed resident. (C) Non-resident Taxed only on Canadian-source income [par. 2(3)(b)]: must carry on business in Canada; activities mostly promotional; but did conclude one short-term contract in Canada; business includes an adventure in nature of trade; activity may be considered an adventure in nature of trade because of isolated sale, marketing effort for one product; possible argument that adventure in nature of trade does not constitute carrying on a business, because of lack of continuity. (D) Effect of CanadaU.S. Income Tax Convention: even if carrying on a business in Canada, business profits must be from a permanent establishment in Canada to be taxable in Canada; no business address in Canada; only employee with short-term accommodation in Canada. (E) Conclusion: not resident in Canada because of central management and control in the U.S.; unlikely to be considered to have carried on business in Canada; event may be adventure in nature of trade, but no continuity; no Canadian permanent establishment so Treaty exempts the corporation from Canadian taxation of any business profits.

Solutions to Chapter 2 Assignment Problems

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Problem 8 (Advanced)
[ITA: 2, 250, 253] Capitol Life Insurance Company (Capitol) was incorporated in the United States in the state of Colorado at the turn of the century. Its head office had always been in Denver, Colorado. Capitol was a subsidiary of Providence Capitol Corporation which in turn was a subsidiary of Gulf & Western Industries Inc. (Gulf). Gulf owned approximately 600 subsidiaries, 240 of which were in turn owned by Associates Corporation of North America (Associates). Six of these latter corporations were Canadian companies. Capitol was in the business of writing individual and group life and health insurance policies. Capitol also wrote creditors group life and health insurance policies for the 240 finance companies which were part of the Gulf group of companies. Under a creditors group insurance policy, Capitol would pay to the finance company, upon the death or disability of the borrower, the outstanding amount of the loan in the case of death or the required instalment payments in the case of disability. The costs of the insurance were effectively passed on to the borrower, either as a separate charge or as a higher interest rate. In the late 1960s, Capitol planned to expand into Canada and obtained licences in nearly every province and obtained federal registration under the Foreign Insurance Companies Act (FICA). The FICA registration required that Capitol name a chief agent in Canada and that he be given a power of attorney. Capitol was also required to make deposits with the insurance superintendent and maintain assets in Canada. Two bank accounts were opened in Canada. The planned expansion into Canada was cancelled. However, the licences and registration were maintained. This required that Canadian representatives and agents be retained as locations for the licensing authorities to serve legal notices. All reports to the licensing authorities and all inquiries of the licensing authorities were to be passed through the Canadian chief agent. The reports to the licensing authorities were prepared in Denver and all inquiries were passed on to Denver by the chief agent. The chief agent was required to maintain copies of records required by the superintendent of insurance. None of Capitols representatives or agents ever solicited insurance or were expected or authorized to do any business. The chief agent countersigned the cheques on Capitols general bank account on the requirement of the insurance superintendent. He had no means to verify the legitimacy of the cheques; as all books and records were maintained in Denver where the cheques were prepared. The agent later deposited the premiums received in an effort to streamline the former procedure of having the premiums sent to Denver and then sent back to Canada through the bank for deposit into the Canadian general account to meet licensing requirements. All investments were administered and managed in Denver. Capitol did not have anyone in Canada who solicited insurance business, collected premiums, processed or paid claims, administered investments or countersigned any claim cheques. Capitol had five group insurance contracts under which the lives of Canadian residents were insured. These policies were all issued to affiliated companies without solicitation in Canada. Two of these policies were creditors group insurance policies with Associates. They were each drafted in accordance with Denver law and signed in Denver by the president of Associates, who was a resident of Indiana. Associates was shown as the insured company and paid all premiums. On the insistence of the Canadian insurance authorities, the wording of the agreements was amended to reflect a premium collection fee. The original agreement provided for a retroactive adjustment of premiums based upon past claim experience. Capitol and Associates continued to administer, interpret and apply the agreement in the same manner as the original agreement. Blank insurance certificates were also required to be issued so that they could be provided to borrowers whose loans were insured as a way of informing them of the terms of the coverage. The coverage took place independently of the issuance of a certificate to an individual. These certificates listed the Canadian head office of Capitol as being in Don Mills, Ontario, as required by the federal insurance superintendent. This office was never used as a head office. The federal insurance superintendent also required the issuance of a brochure for the information of the Canadian borrowers whose lives and health were insured. The income that Capitol received from the Canadian insurance and investments represented a very small proportion of its total revenue. Canadian operations were not kept separately from U.S. operations, no Denver personnel were charged with Canadian operations, and there were no special Canadian claim forms or procedures. The only separation of Canadian business from U.S. operations to be found in the accounts of Capitol was to comply with the Canadian insurance authorities. All corporate meetings as well as all levels of management took place in the United States. REQUIRED Prepare a memo for the tax person in your firm who will advise Capitol on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation. Discuss each possible degree of residence and its tax consequences. State your conclusions on this case after weighing the relevance of the facts you have considered.

30 Solution 8 (Advanced)
(A)

Introduction to Federal Income Taxation in Canada: Fundamentals

[Reference: Capitol Life Insurance Company v. The Queen, 84 DTC 6087 (F.C.T.D.)] Full-time resident: taxed in Canada on worldwide income for the whole year: (i) where central management and control actually abides, central management and control in Denver, all corporate meetings as well as all levels of management took place in the United States, Canadian operations were not kept separately from U.S. operations, no Denver personnel were charged with Canadian operations and there were no special Canadian claim forms or procedures, all investments were administered and managed in Denver, (ii) on the other hand, certificates listed the Canadian head office of Capitol as being in Don Mills, Ontario, the chief agent countersigned the cheques on Capitols general bank account. Deemed full-time resident: taxed in Canada on worldwide income [ssec. 250(4)]: (i) must be incorporated in Canada, cannot be deemed resident because incorporated in the United States. Non-resident: taxed in Canada on Canadian-source income [par. 2(3)(b)]: (i) must carry on business in Canada, as evidenced by: the authority and duties of the chief agent, the federal and provincial registrations and licensing, the powers of attorney deposited with the federal and provincial departments of insurance, the operating Canadian bank accounts, listing of Don Mills, Ontario as the Canadian head office of Capitol, the moneys on deposit in Canada pursuant to a special trust, the wording change to the agreements to refer to a premium collection fee on the insistence of the Canadian insurance authorities, the brochure was issued to Canadians, (ii) on the other hand, all of these activities resulted from the requirement to comply with the superintendent of insurance and would not have otherwise existed, except for the Canadian banking facilities which were maintained to expedite the transfer of funds, the maintenance of registration under FICA served to avoid duplications in provincial jurisdictions with respect to such matters as the amount of deposits required to be maintained to guarantee the fulfillment of obligations, the completion of contracts with a Canadian company, Associates, does not constitute doing business in Canada, as the contracts were made in the United States, the individuals whose lives and health were covered by the insurance were Canadians. However, it was Associates who was insured, not the individuals. Effect of CanadaU.S. Income Tax Convention: business profits must be attributable to a permanent establishment in Canada to be taxable in Canada, there was no permanent establishment in Canada. Conclusion: not resident in Canada, as central management and control were exercised in Denver, had not carried on business in Canada, as insurance policies were all signed in the United States and all other activities in Canada were undertaken to comply with insurance regulations, except for the nature of the deposits to the Canadian accounts (which was a minimal level of activity).

(B)

(C)

(D)

(E)

Solutions to Chapter 2 Assignment Problems

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Advisory Case
Case 1: Transfer to France Sally has just come to you for advice on a possible job transfer to Paris, France. She is currently working for a large private corporation located in St. Catharines, Ontario. It is now April and the president of the company has asked Sally, who is the company's computer network expert, to move to Paris for at least two years. Her time there may extend beyond two years, but that will depend on the success of the project she will be working on. Sally is married to Harry and they have two daughters, ages six and eight. The company wants Sally to be in Paris and working by May 15, so she will have to leave by May 10 to get there and settled in time. She is planning to rent a furnished apartment when she arrives. Her children are in school and won't be done until the end of June. Harry has his own career as a school teacher and is willing to take an unpaid leave of absence for two years, but he can't leave until the end of June or middle of July at the earliest. Sally and Harry enjoy golf and have recently joined a fairly exclusive club in the St. Catharines area, after an eight-year waiting period and after paying a large initiation fee. They do not wish to give up this membership. Their home is located just outside the city on 20 acres and they are very reluctant to sell it, as they would not be able to replace it on their return. Both Sally and Harry grew up in the St. Catharines area and their families still live there. Sally's parents and Harry's parents are retired. Sally and Harry both want to move to Paris, and they have come to you for tax advice on whether they could be considered non-residents of Canada, or what, if anything, they could do to achieve this result. ADVISORY CASE DISCUSSION NOTES This is a planning situation. The students are to recommend planning points that would support the desired result of the family being non-resident. There are two main issues in this case. The first is whether Sally and Harry will be able to support nonresident status given their circumstances. The second is, if they can argue non-resident status, what their date of clean break is. Non-Resident Status There are two main issues with trying to plan for this family to become non-residents: they need to support their argument that they have severed ties to Canada, and they need to establish that they have become residents of France. To sever ties to Canada, Sally and Harry need to plan around the following main issues: Length of stay in France: The family is going to be in France for at least two years, but that may be extended. Clearly, the shorter the stay, the greater the risk that they will not be able to successfully defend nonresident status if challenged. Golf club: Given that Sally and Harry do not want to give up their golf club membership, they will need to see if the club has a non-resident membership status that would allow them to keep their membership, pay lower annual fees, and clearly indicate to the CRA and others that they have left. However, a stronger case for nonresidency could be made if they gave up their membership altogether. It should be noted that the golf club nonresident classification probably also applies to those who have moved to, for example, another province. Home: While it is clearly best for them to sell their home to establish a break in ties, they are reluctant to do this. If they wish to keep it, they should rent the property to a third party. In Interpretation Bulletin IT-221R3, in paragraph 6, the CRA states:
Where an individual who leaves Canada keeps a dwelling place in Canada (whether owned or leased), available for his or her occupation, that dwelling place will be considered to be a significant residential tie with Canada during the individual's stay abroad. However, if an individual leases a dwelling place located in Canada to a third party on arm's length terms and conditions, the CCRA will take into account all of the circumstances of the situation (including the relationship between the individual and the third party, the real estate market at the time of the individual's departure from Canada, and the purpose of the stay abroad), and may not consider the dwelling place to be a significant residential tie with Canada except when taken together with other residential ties (see 17 for an example of this situation and see 9 for a discussion of the significance of secondary residential ties).

If they do decide to keep the house, then this will increase their risk of being considered residents of Canada.

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Introduction to Federal Income Taxation in Canada: Fundamentals

Harry is on leave, he did not resign: Harrys circumstances must be considered in this case. He is not planning to resign from his teaching position; instead, he is taking an unpaid leave. This indicates a less permanent move. It would be a stronger argument for non-resident status if he did resign. Family ties: Sally and Harrys extended family ties are clearly still in Canada. There is nothing they can do about this. Visits back to Canada: They will need to be careful how often they come back to Canada on visits, and how long they stay. The more frequent the trips, and the longer the stays, the weaker the non-resident argument. Remember, the courts can view the next few years to determine whether the family severed their residential ties this year. Other issues: Sally and Harry should also do the following: 1. Advise those authorities who administer drivers licenses and medical coverage that they are now nonresidents. 2. Close out their Canadian bank accounts or tell the bank that they are non-residents so withholding tax can be deducted from interest payments. 3. Move their investments to France and make sure their advisers are notified of their non-resident status. 4. Indicate on their tax returns the date of ceasing to be resident (see Date of clean break, below). Establishing residency in France: For the family to be considered non-residents of Canada, they need to have established residential ties somewhere elsein this case, in France. The CRA, in paragraph 14 of Interpretation Bulletin IT-221R3, states:
Where an individual leaves Canada and purports to become a non-resident, but does not establish significant residential ties outside Canada, the individual's remaining residential ties with Canada, if any, may take on greater significance and the individual may continue to be resident in Canada. However, the fact that an individual establishes significant residential ties abroad does not, in and by itself, mean that the individual is no longer resident in Canada, as the Courts have held that it is possible for an individual to be resident in more than one place at the same time for tax purposes.

Renting a furnished apartment may be appropriate for Sally when she first arrives, but she should find more permanent accommodations when the family arrives. Date of clean break Assuming the family can successfully argue that they have become non-resident, you need to determine what day they officially achieved this status. Sally is to be in France on May 15, so, if she leaves May 10, is that the date? Alternatively, Harry and the children will leave, say, July 15, so is that the date? The CRA, in Interpretation Bulletin IT-221R3, at paragraph 15, states:
It is a question of fact to be decided with regard to all of the circumstances of the case on what date a Canadian resident individual leaving Canada becomes a non-resident for tax purposes. Generally, the CCRA will consider the appropriate date to be the date on which the individual severs all of his or her residential ties with Canada, which will usually coincide with the latest of the dates on which (a) the individual leaves Canada, (b) the individual's spouse or common law partner and/or dependants leave Canada (if applicable), or (c) the individual becomes a resident of the country to which he or she is immigrating.

The first two of the three dates set out above are easy to determine in this case. The third may be more difficult and is discussed above. This is not a particularly significant issue in that if you are arguing between May 10 and July 15it is only about two months, and it only affects the tax return in the year of departure. Conclusion There is always a risk that the CRA and the courts will not agree with Sally and Harrys filing position that they are non-resident. All the adviser can do is arrange the given facts in the best way to minimize the risk. In this case, the risks of reassessment centre on the following issues: 1. Keeping the home 2. Length of stay in France 3. Establishing residential ties in France

Solutions to Chapter 2 Assignment Problems

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Case 2: Move to Chile The plaintiff, Jennifer Marken, is a 21-year-old Canadian citizen and has always lived and worked in Regina except for the last two years. During these two years, she obtained a position as an English teacher for a local school in Osorno, Chile. Originally, the two-year contract could have been extended into a permanent position at Jennifer's option. However, at the end of the two-year period Jennifer's brother became suddenly ill and she opted to return to Regina and complete her education degree. She is scheduled to appear in court next week to claim that she was a non-resident of Canada during the two-year period and therefore should not be liable for Canadian tax. Both the CRA and Jennifer's counsel agree on the following facts: Jennifer is a Canadian citizen and all of her direct family resides in Saskatchewan. Jennifer's fianc visited her five times during the two-year period and lived in Chile during his summer vacations. He plans to complete his accounting designation with a Canadian firm in Saskatchewan. All of Jennifer's income during the two-year period was paid by the Chilean school (January 2005 January 2007). Upon departing for Chile, Jennifer put all of her furniture in storage and leased her car to her younger sister on a month-to-month basis. Her household belongings were shipped to Chile. While in Chile, she maintained her provincial health care policy, her Canadian savings account and a Canadian American Express card. She cancelled her Canadian chequing account, and her Canadian Visa card. Before leaving, she cancelled all of her club memberships and abdicated her position as the honorary chair of the Beta Gamma Phi sorority. While in Chile she made no attempt to learn the Spanish language and did not join any Chilean organizations. She rented a one-bedroom apartment from another Canadian living in Osorno. Over the two-year period, Jennifer visited Canada each Christmas, at Easter, and for the marriage of her best friend. Her total number of days in Canada over the two-year period amounted to 50 days.

Jennifer's litigation counsel would like your advice on the income tax options for the two-year period during which Jennifer worked in Chile. Provide your perspective on the facts that support each place of residence and the tax consequences they entail. Weigh the relevance of the facts and conclude on the likely outcome in this situation. ADVISORY CASE DISCUSSION NOTES In this case, it is necessary to determine Jennifers residency status for tax purposes. Since residency is not defined in the Act, it is necessary to consider the facts underlying each case. As a full-time resident of Canada, Jennifer would be taxed on her worldwide income over the two-year period. The facts that support this status are: (1) Jennifers Canadian background and her permanent return to Canada at the end of the two years; (2) her return visits to Canada; (3) Jennifer retained a Canadian bank account and her Canadian American Express credit card; (4) she kept substantial assets (i.e., furniture and car) in Canada; (5) her family and social ties remained in Canada; (6) she maintained her provincial health care policy; and (7) her intentions to stay in Chile were not clear (i.e., unfinished Canadian degree, fianc remaining in Canada, not learning the native language, and not integrating into Chilean society). As a deemed full-time resident of Canada, Jennifer would be taxed on her worldwide income throughout each year. However, there are no facts supporting this residency status as she did not sojourn in Canada for more

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Introduction to Federal Income Taxation in Canada: Fundamentals

than 182 days in either of her two years spent in Chile.

Solutions to Chapter 2 Assignment Problems

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As a part-year resident of Canada, Jennifer would be taxed on her worldwide income for the portion of the year that she was considered a full-time resident. However, a clean break must be established for Jennifer to be given part-year status. The facts supporting a clean break include: (1) she cancelled her student club memberships and abdicated her position as chair; (2) her sole source of income was from a Chilean source; (3) she moved most of her personal and household belongings to Chile; (4) her contract contained the option to extend her position for more than two years; and (5) she cancelled her Canadian chequing account and her Canadian Visa card. As a non-resident of Canada, Jennifer would be taxed only on her Canadian-source income. Since Jennifers income for the two years will be from Chilean sources, she would not be liable for Canadian tax. The facts that support non-resident status are the same as the ones supporting her clean break for part-year residency. If it is concluded that she made a clean break at a point in time, then she will be considered to be a non-resident after that time. Conclusion In all probability, the courts would rule that Jennifer is a full-time resident of Canada. The reasoning behind this decision is two-fold: she did not sever all her ties to Canada, nor did she attempt to integrate into Chilean society. The facts supporting this conclusion may outweigh the facts supporting her intentions to make Chile her permanent residence. Consequently, she will be taxed on the income she earned in Chile during her two-year stay. However, as a result of international tax treaties, Jennifer will most likely be eligible for a foreign tax credit for the amount of tax she has had to pay to the Chilean government and her Canadian taxes payable will be reduced by the amount of the credit. An actual case, with facts much like those in the above case in which the Court came to a similar decision, is Glow v. The Queen, 92 DTC 6467 (F.C.T.D.).