Residence Of Individuals

Article by Greg Gartner1

1. INTRODUCTION

   The governments of Canada are facing increased scrutiny and criticism in respect of the growing deficits that have been accumulated at both the federal and provincial levels. Increasing taxation or cutting spending are the basic ways in which governments attempt to deal with budgetary shortfalls. While both options are unpopular with voters, it is suggested that the provincial governments will have no other option but to rely on increased taxation as the primary tool as they are responsible for funding increasingly expensive programs, such as health care, education and the administration of justice. Despite equalization payments amongst the provinces, it appears that the provinces are not able to provide equivalent services to their residents at similar levels of taxation; this has lead to significant variation amongst provincial taxation rates. Revenues from taxation can be increased by simply increasing the tax rate, or alternatively, increasing the scope of the tax base. Thus, it is likely that provinces with higher rates of personal income tax will be pressuring the Canada Revenue Agency (the "CRA") to closely examine the residency claims of individuals who have recently filed as residents of a province with a lower rate of personal income tax as to prevent leakage from their tax base.2

   Traditionally tax planning focuses on reducing taxes payable by altering the timing of tax payments, altering the tax character of receipts or expenditures, and/or altering the jurisdiction of taxation so as to subject income to as low a rate of tax as possible.3 Due to the increasing mobility of capital and labour in Canada and the varying tax rates amongst the provinces, there has been an increased focus in recent years on inter-provincial tax planning to lower an individual's overall rate of taxation.

   This paper begins with an overview of the legislative framework under which provincial income taxes for individuals are levied. The definition of "residence" is then discussed and a number of current cases with respect to provincial residency are reviewed. Finally, dispute resolution mechanisms for individuals who wish to challenge an assessment related to provincial residency are canvassed.

2. LEGISLATIVE BASIS

   1. The Constitution

      The governments of Canada (including the provinces and territories (collectively referred to as the "provinces")) can impose taxes only on the authority of legislation pursuant to the Constitution Act, 18674(the "Constitution"). The Constitution, pursuant to subsection 91(3), allows the federal government to raise money by any mode or system of taxation. The only jurisdictional limit on a province's right to impose taxation is found in subsection 92(2) of the Constitution which states that a province is limited to direct taxation imposed within the province to raise revenues for provincial purposes. In other words, the provinces have the power to tax individuals based on residence, domicile, employment, or carrying on business in the province as long as the connection to the province is substantial.5

      The Supreme Court of Canada in Dunne c. Quebec (Sous-ministre du Revenu)6discusses what connection to the province is required for the province to be able to levy provincial income tax. The Court noted that subsection 92(2) of the Constitution is construed broadly and with flexibility to include the "power to tax residents of the province...[and also to] tax property, businesses and transactions within the province"7. Mr. Dunne was a chartered accountant and retired partner of Ernst & Young. Mr. Dunne was resident in Ontario and had never carried on business in Quebec, however he was assessed for provincial income tax under the Taxation Act8(the "Quebec Act"). The Court held that the partnership agreement established that Mr. Dunne received a share of the profits of the partnership which carried on business in Quebec and that the Quebec Act's deeming provisions operated to determine the proportion of the individual's income that could be allocated to Quebec activities and thus validly taxed under the Quebec Act. The Court held that the Quebec Act did not improperly expand the scope of the provincial taxing power.

   2. The Income Tax Act

      The Act,9 and the regulations made thereunder, are the primary source of income tax law with respect to levying taxes. Canadian residents are liable for tax on their worldwide income pursuant to subsection 2(1) of the Act. The occurrence of residence in Canada provides the basis for jurisdiction to tax and thus creates the liability for taxation of a person.10 Individuals, including trusts11, are thus liable for both federal and provincial tax. The specifics of what constitutes "residence" will be discussed in a later section of this paper.

      (a) Income of an Individual

      The Act itself does not in fact impose a provincial tax. The phrase "income earned in the year in a province" is defined in subsection 120(4) of the Act to mean an amount determined under rules prescribed for the purpose by regulations made...