Canadian taxpayer's residency questioned based on "center of vital interest".

A recent tax court decision (Powertex, TC Memo 1998-231), provides guidance on the U.S.-Canadian residency tiebreaker provisions.

Despite the amendments to Article IV of the U.S.-Canada treaty, and recent developments concerning green-card holders, this is an interesting case for Canadian southbounders.

There are two ways to attain U.S. residency--either to pass the substantial physical presence test (183-day rule) or to be lawfully admitted for permanent residence (green-card test). Once a person attains tax residency, it can be overridden by a tax residency treaty-tiebreaker provision.

Although recent immigration legislative developments indicate greencard holders using the treaty-tiebreaker provision could result in the loss of green cams, these developments did not apply in Powertex. But the factors discussed in the case remain relevant in today's environment.

Moving South

In Powertex, a Canadian citizen applied for U.S. resident alien immigration status, which was granted through Dec. 31, 1990. During 1990, the taxpayer was a minority owner and vice president of two companies, one in Montreal and the other in South Carolina; he was also a minority owner in two partnerships that owned and leased property in the U.S.

In January 1990, the taxpayer met a woman (whom he would marry the following year), who was a resident of Fort Lauderdale. During 1990, the taxpayer spent only 120 days in Montreal; the rest of the time was spent living in Florida (160 days) and traveling throughout the U.S. attending trade shows.

In March 1990, one of the corporations purchased a mobile telephone service for the taxpayer's use at his girlfriend's apartment, where he kept a desk and fax machine to conduct business while in Florida.

In May, the taxpayer transported a boat he co-owned with his brother and docked it at the marina in Florida that serviced his girlfriend's apartment. The taxpayer obtained an insurance policy on the boat and listed his girlfriend's apartment as his address.

While in Florida, the taxpayer drove a company car and, in August, obtained a Florida driver's license that identified his address as his girlfriend's apartment.

During 1990, however, the taxpayer also shared an office with his brother at the family home in Canada. He maintained a room and kept personal belongings there, including two cars (both of which were registered in Montreal).

The taxpayer retained his Montreal driver's license and Canadian health insurance. He saw a Canadian doctor, and maintained bank accounts at four Montreal banks.

Treaty Tiebreaker

For 1990, the taxpayer filed a Canadian resident income tax return. The issue was whether the taxpayer was a U.S. resident during 1990. The taxpayer argued the treaty-tiebreaker provision applied. The U.S.-Canada treaty governs a taxpayer's residency only if the taxpayer shows he is a resident of both the U.S. and Canada.

During 1990, the taxpayer was a resident of the U.S. because he retained resident alien immigrant stares. He also had to show, however, that he was a Canadian resident on the basis of Canadian law.

At trial, the taxpayer did not introduce or cite any Canadian law on the issue of residency. He failed to cite a single Canadian statute, regulation or case that would be a relevant precedent.

Because the family home in Montreal was available to him continuously during 1990, it appears that the taxpayer had a permanent home in Canada; several facts previously mentioned tended to show that the Montreal home was his permanent home. On the other hand, because the taxpayer's girlfriend's apartment in Fort Lauderdale was available to him continuously during 1990, it also appears that the taxpayer had a permanent home in the U.S.

Given the taxpayer's strong ties to both the U.S. and Canada during that year, it appears that, in applying the U.S.-Canada treaty and the commentary to the Model Treaty, there would be doubt as to which location was the taxpayer's "center of vital interest."

In the case of doubt as to the location of the "center of vital interest," the Model Treaty explains: "In ... the case where the individual has a permanent home available to him in both States ... [the balance] tips toward the State where he stays more frequently."

During 1990, the taxpayer spent only 120 days in Montreal, and he spent the remainder of the year in the U.S. Because he spent more time in the U.S. than in Canada during 1990, it appeared the taxpayer had a habitual abode in the U.S.

On this basis, the court concluded that, even if the Canada Convention had been applied, the taxpayer could not establish that he was a Canadian resident for tax purposes during 1990.

FROM BILL ZINK, CPA, CHICAGO, IL