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16 October 2005

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Tax Court of Canada applies tie-breaker rules in CanadaKorea (Rep.) tax treaty to determine residence status

In a case before the Tax Court of Canada (TCC), decided on 22 July 2005 (Yoon v. The Queen), a Canadian citizen, Yoon, born in Korea (Rep.), claimed that she was no longer a resident of Canada in the 2001 tax year and, therefore, her employment income was exempt from taxation in Canada under the Canada-Korea income tax treaty of 10 February 1978.

(a) Facts. The taxpayer grew up in Korea and attended university there. In 1975, she moved to Canada, married, became a Canadian citizen and had two children. In 1984, she and her family moved back to Korea. In 1999, she and her husband decided that they would retire in Canada in the future and, in February 2000, they purchased a town house in Canada. In 2000, she spent 301 days in Korea and 34 days in Canada. Her children continued to live in Korea throughout 2000.

In December 2000, she signed a contract for a term of 2 years to work for a company in Korea. She owned and used two cars in Korea. She also owned and used a car in Canada and had bank accounts in Canada. She carried a Korean Health Insurance Card and had four bank accounts in Korea. Her only sources of income in 2001 were the funds paid by the Korean company. She was engaged in several social cultural and religious activities in Korea in 2000 and 2001. In 2001, she spent 135 days in Canada and 224 days in Korea. Her husband spent most of 2001 in Canada. In 2002, she continued to travel back and forth to Korea, gradually spending more and more time in Canada than in Korea.

(b) Decision. The TCC found that, in the 2001 tax year, the taxpayer was not a resident of Canada. Although she had available to her a residence in British Columbia, the time spent in Canada in 2001 was minimal compared to her residential stays in Korea. The length of her stays in Canada versus those in Korea favoured a residence in Korea or at least pointed to a non-residence in Canada. Her social, cultural and religious connections in Korea were much more extensive than those in Canada. Her contract with the Korean employer obliged her to perform her services in Korea. In addition, the fact of the two children residing with her in Korea is another tie of residence in Korea. Her only substantial family tie with respect to Canada was that of her husband living in Vancouver. Following Shih v. R., 2000 DTC 2072 (T.C.C.), the Court found that it was important to examine the taxpayer's settled routine and customary mode of life.

Having found that the taxpayer was not resident in Canada, the Court determined that it was not necessary to look at the taxpayer's residence in Korea. The Court found, however, that, if it was necessary to look at residence under Korean law, there was no evidence provided of that law. Accordingly, the Court had to act as if the foreign law was the same as its own law under the lex fori presumption. Based on the evidence, the Court found the taxpayer would be a resident of Korea under Canadian law.

Having found that the taxpayer would be resident in Korea under Canadian law, the Court turned to the tie-breaker rules in the Canada-Korea tax treaty. The Court found the taxpayer did have a permanent home in both states. As she had a permanent home available to her in both states, she is deemed to be a resident of the country with which her personal and economic relations are closest (her "centre of vital interests"). In determining her centre of vital interests, it is not enough to simply weigh or count the number of factors or connections on each side. The depth of the roots of the centre of vital interests is more important than their number.

The Court cited Gaudreau v. R., 2005 DTC 66 (TCC), in which the Court stated that, "... if a person who has a home in one state sets up a second in the other state while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interest in the first state."

The Court found the taxpayer had extensive family, social and cultural ties to Korea, whereas her social life in Canada revolved primarily around her husband, as she had not yet established any substantial ties to the community. She did not work in Canada. Her only source of active income was from her employment in Korea. She had bank accounts, credit cards and driver's licences in both Canada and Korea. She had health insurance in both Canada and Korea. Her future plans to retire in Canada were not determinative of where her centre of vital interests lay in 2001. The centre of vital interests test requires an examination of the taxpayer's connections to each country in that specific year. In any event, the 2-year contract that she signed signified an intention to live and work in Korea in the near future.

The Court went on to look at the taxpayer's place of habitual abode, in the event the taxpayer's centre of vital interests was not determinative. The evidence showed that the taxpayer spent more time in Korea than in Canada in 2001. Accordingly, her habitual abode was in Korea and not Canada. If her centre of vital interests cannot be determined, then this tie-breaker rule provides that she was a resident of Korea in 2001.  

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