15 June 2022 STEP Roundtable Q. 15, 2022-0927531C6 - Meaning of Habitual Abode in Canadian Tax Treaties

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What is an habitual abode of an individual as referenced in Canadian tax treaties and what factors does the CRA review to make a determination?

Position: It is the place an individual normally lives during the relevant period of time. Various factors are considered, including frequency of stays and lifestyle in the country.

Reasons: Plain meaning of words, as well as various TCC and FCA positions and OECD Model Convention Commentary.

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 15. Meaning of Habitual Abode in Canadian Tax Treaties

As you know, Canada’s extensive treaty network contains residency “tie-breaker” provisions – usually in Article IV:2 of most of the treaties. For example, in the Canada-US treaty, the residency “tie-breaker” rule is indeed in Article IV:2. Paragraph (b) of the provision states:

“…if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;”

Can the CRA comment on its views of what an habitual abode is of an individual and what factors the CRA reviews to make a determination?

CRA Response

Under Canadian domestic law, an individual may be a factual resident or deemed resident of Canada, both of which are liable to tax in Canada on worldwide income. Although the term “resident” is not defined in the Act, its meaning has been determined by the Courts. The leading decision on the meaning of resident is Thomson v. Minister of National Revenue, [1946] S.C.R. 209, 2 DTC 812. In this decision, Rand J. of the Supreme Court of Canada held residence to be “a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.” To determine factual residence of an individual, all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intention and continuity with respect to stays in Canada and abroad. For greater clarity, the CRA has split residential ties into three main categories: significant residential ties, secondary residential ties, and other residential ties. Significant residential ties include an individual’s dwelling place(s), spouse or common law partner, and dependents. Secondary residential ties include personal property, social ties, and economic ties. Other residential ties include a Canadian mailing address, post office box, or safety deposit box, but are generally of limited importance except when considered together with other factors. If an individual is not considered a factual resident of Canada based on residential ties, they may still be considered a deemed resident under subsection 250(1).

If it is determined that an individual is a resident of Canada as well as a resident of another country, then the “residency tie-breaker” provision under Article IV:2 of the treaty between the two countries, if any, may apply. Under the Canada-US treaty, the term “resident” includes an individual who is liable to tax by reason of that individual’s domicile, residence, or citizenship. When applying the “residency tie-breaker” tests in Article IV:2, they are applied in order, starting with paragraph (a), which considers where the individual has a permanent home. If that test is not determinative because the individual does not have a permanent home in either country, or the individual has a permanent home in both countries, then the second test, relating to the individual’s centre of vital interests, under paragraph (b), is considered. This test looks at personal and economic ties the individual has in each country and will usually determine an individual’s residence, if it has not yet been determined through a previous step. If the individual’s centre of vital interests cannot be determined, only then is the individual’s habitual abode, under paragraph (c), considered.

The same progression of “tie-breaker” tests is found in most of Canada’s treaties as they mirror the tests found in the Organization for Economic Co-operation and Development (“OECD”) Model Tax Convention on Income and on Capital (“Model Treaty”).

The objective of the “habitual abode” test can generally be described as identifying where the individual usually lives. For individuals who have a permanent home in both countries, or in neither, and where the centre of vital interests is not determinative, stays in all countries must be considered to identify where the individual usually or habitually abides. In gauging the stays in a country, the nature of the individual’s activities at the location(s) in a country may also aid in establishing where the individual’s usual or habitual abode is. The stays in a country must be gauged over a sufficient period of time to identify where the individual usually lives. This period of time should be one that is reasonable and appropriate in the circumstances and is not necessarily limited to a specific period, such as a calendar year. For additional information regarding determining an individual’s residence status, see Income Tax Folio S5-F1-C1. Additional information on the habitual abode test can also be found in the official commentary to Article 4 of the OECD Model Treaty (paragraphs 19-20).

Alison Spiers
2022-092753