Part 1: Tax Treaties, determining "tax residence" and new OECD Common Reporting Standard ("CRS")

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The above tweet references an article from Stikeman Elliot which includes:

For CRS purposes, the term “reportable person” generally refers to a natural person or entity that is resident in a reportable jurisdiction (excluding Canada and the United States) under the tax laws of that jurisdiction, or an estate of an individual who was a resident of a reportable jurisdiction under the tax laws of that jurisdiction immediately before death, other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a related entity of a corporation described in clause (i); (iii) a governmental entity; (iv) an international organization; (v) a central bank; or (vi) a financial institution.  See definitional subsection ITA 270 (1).

This morning I received an email that included the following question:

My friend lives and works in country A, and has bank accounts in Country B. He is a permanent resident of Canada. Will the banks in either Country A or Country B, report his accounts to the Canada Revenue Agency? Country A (where he resides) has no income tax system. This is common in Gulf Countries. Country A has not signed on to Common Reporting Standard. Country B (a European country) has signed on to the Common Reporting Standard.


Part A – let’s review how the Common Reporting Standard works.

Leaving aside the technicalities, to understand how the Common Reporting Standard works, the obvious questions are:

  1. What is a “reportable jurisdiction”?
  2. What is a “reportable person”?
  3. What is a “tax resident” and how is that determined?

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A “reportable jurisdiction” is a country that has agreed to implement the OECD Common Reporting Standard.

Note that the United States has not agreed to implement the Common Reporting Standard. Therefore, the United States is NOT a “reportable jurisdiction”. As been noted by many, this fact does contribute to and enhance the United States as a Tax Haven.

A “Reportable Person” as described by HSBC is:

From HSBC

‘Reportable Person’ A Reportable Person is defined as an individual who is tax resident in a Reportable Jurisdiction under the tax laws of that jurisdiction. Dual resident individuals may rely on the tiebreaker rules contained in tax conventions (if applicable) to solve cases of double residence for purposes of determining their residence for tax purposes.

Note especially the ability to use the Tax Treaty to determine residence in the case of multiple residencies.
 (Think for example about “residence” and Article IV of the U.S. Tax Treaty. This will be a way to prevent information going to certain countries.)

What are the individual country rules for determining “tax residency”?

Here is a dedicated (and amazing) site that is used to determine whether one is a “tax resident” in a specific jurisdiction.

If you are ambitious and would like to get this “straight from the horses’s mouth”, see the information referenced in the following tweet:

Part B – How Do The Banks Understand Their Responsibilities Under the Common Reporting Standard?
General Background of the Common Reporting Standard As Described By HSBC

About the CRS

The Common Reporting Standard (CRS) is a global information-gathering and reporting requirement for financial institutions such as HSBC. It was developed by the Organization for Economic Co-operation and Development (OECD), the G20 countries and in close cooperation with the EU. A detailed explanation of the OECD?s Common Reporting Standard for the Automatic Exchange of Information can be found here.

Under the CRS, we are required to determine where all customers are tax resident – this is will usually be where a customer is liable to pay income or corporate taxes. If the customer is tax resident outside the country where they hold their account(s), we may need to give the national tax authority this information, along with information relating to their accounts. This information may then be shared between different countries’ tax authorities.

The standard consists of three components:

  • The CRS, which contains the reporting and due diligence rules
  • The Model Competent Authority Agreement (Model CAA), which contains the detailed rules on the exchange of information
  • The OECD Commentaries, which provides additional guidance on local implementation of the CAA and CRS

The CRS is being implemented in participating countries through national legislation and as of 1 April 2016, 100 governments have indicated their commitment to, and support for, the CRS.

How do the banks allow residents to “self-certify” their “tax residency” status?

It’s simple. It’ about forms. Here are some sample forms from HSBC.

For individuals:

CRS-I_Individual_Self_Cert_Form

For entities:

CRS-CP_Self_Cert_Form

Notice how the self certification forms work. They DO ask about “place of birth”. But they do NOT ask about citizenship.
Part C – Let’s apply this information to answer our question about the Resident of Country A with bank accounts in Country B who is a “permanent resident” of Canada

My friend lives and works in country A, and has bank accounts in Country B. He is a permanent resident of Canada. Will the banks in either Country A or Country B, report his accounts to the Canada Revenue Agency? Country A (where he resides) has no income tax system. This is common in Gulf Countries. Country A has not signed on to Common Reporting Standard. Country B (a European country) has signed on to the Common Reporting Standard.

The definition of “tax resident” is determined at the treaty level although the Treaty defers (at least at present) to individual country definitions. The legislation of Country B probably says: Many countries have signed on to the CRS. If you are a “tax resident” of any of those countries you need to disclose this on a form.

Therefore, the question becomes: Is our person a “tax resident” of Canada?

In order to determine whether the person is a “tax resident of Canada”,  we begin by going to the OECD site here. We click on Canada and read what it says. You will see that the answer is ambiguous.
It says:

In Canada, an individual’s residency status for income tax purposes is determined on a case by case basis. An individual who is resident in Canada can be characterized as ordinarily resident (also known as factual resident) or deemed resident.

An individual’s whole situation and all the relevant facts must be considered with reference to Canada’s tax laws and views of the Courts.

This is very unclear. It appears to be a question of fact that is determined in each case. The next step is to research what is the meaning of “tax resident” of Canada. Here is an analysis of “tax residency in Canada” which discusses both “deemed residency” or what it means to be “ordinarily” resident. What we learn is that one is a “deemed resident” of Canada if one spends at least 183 days during the year in Canada. Your client has NOT spent 183 days in Canada. Therefore, the question becomes:

Is he “ordinarily resident” in Canada?

Immigration status is a factor but not a determinative factor. Does your friend really still have Permanent Resident status in Canada? This is a question of Immigration law. His status under the Immigration laws will have a bearing on whether he is a tax resident, but it probably not determinative. Consider this: what if he loses his “permanent residency status” and then somehow spends more that 183 days a year in Canada (which would “deem” him to be a “tax resident).
Breaking “tax residency” to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking “tax residency in Canada” can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a “tax resident of Canada”.)

Let’s assume that our “friend”, without considering possible “tax treaties” is or may be considered to be “ordinarily resident” in and therefore a “tax resident” of Canada.

Would a consideration of possible tax treaties (specifically the “tax treaty residency tiebreaker) make a difference in determining tax residency?

This question will be considered in Part 2 – a separate post.

This completes Part 1 of a 2 Part series of posts.

John Richardson

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