Inter-Provincial Issues Of Interest

Article by Kim G. C Moody, Tim Clarke and Lisa Handfield1


    Comparing prices is a hobby of many shoppers and this may be equally true when it comes to paying taxes as many individuals, corporations and trusts alike "shop" jurisdictions for the lowest rate. Despite equalization payments amongst the provinces, the provinces do not appear to be able to provide equivalent services to their residents at similar levels of taxation. While the varying costs of providing provincial services may be due to the presence or absence of other revenues, such as royalties, or the number and dispersion of their residents, the bottom line remains - there is significant variation amongst provincial taxation rates.

    Due to advancements in technology, society today is undergoing a future shock2 - a structural change which can sometimes be overwhelming. With this change comes almost seamless mobility of capital which may allow entities to shift wealth to lower tax jurisdictions. Arguably, advances in technology increase mobility of labour as well; for instance, thousands of workers from across the country commute to Alberta's oil sands for work. Given this increased mobility of capital and labour, rate "shopping" amongst provinces becomes easier.

    This paper will consider a number of inter-provincial issues, beginning with a review of the legislative framework under which provincial income for individuals, trusts and corporations are levied as well as the tests for residency. A variety of inter-provincial plans are then discussed as well as recent case law. The paper concludes with some comments on the general anti-avoidance rule (the "GAAR").


    Individuals, trusts and corporations are liable for tax in Canada on their worldwide income pursuant to subsection 2(1) of the Income Tax Act (Canada)3 (the "Act") if they are resident in Canada during the period. The occurrence of residence in Canada provides the basis for the jurisdiction to tax and thus creates the liability for taxation of a person.4 In addition to being liable for taxes under the Act, individuals, trusts and corporations are liable for taxation on a provincial basis as levied by the various provincial tax acts. Provincial taxation is generally levied on a similar basis, that of residency.

    Non-residents of Canada are taxable on income from an office or employment pursuant to section 115 of the Act and Regulation5 2602 will impute this income to the province(s) in which the duties thereof were performed. Similarly, a non-resident corporation will be taxable on its Canadian source income under section 115 of the Act. Non-resident corporations may also be subject to the "branch tax" pursuant to Part XIV of the Act, which generally will be applied to Canadian-source business income and related taxable capital gains. Non-residents are also taxable if they carry on business in Canada or dispose of taxable Canadian property. Withholding tax is applicable to interest, rents, royalties, dividends and management fees paid or credited to non-resident persons. Similarly, as a general principle, business income is taxed in the province where it is derived.


    1. The Federal and Provincial Taxing Power

      Under subsection 91(3) of the Constitution Act, 18676 (the "Constitution"), Parliament has unlimited power to impose any mode or system of taxation. Unlike the provinces, there is no qualitative or territorial limit to Parliament's authority to impose taxes. While the provinces are limited, Parliament may impose any form of direct or indirect taxation inside or outside Canada.7

      The province's powers of taxation are limited to raising revenue for provincial purposes by means of direct taxation within the province under subsection 92(2) of the Constitution. The words "raising of a revenue for provincial purposes" have been given little significance...

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