The case for interprovincial tax planning
by Jamie Golombek
The term "dual resident" is most often used to describe someone who is a resident of Canada and another country (typically the U.S.) and who divides his or her time throughout the year between the two countries. Dual national residency can lead to
complex tax results, most of which are dealt with in the tax treaties negotiated between Canada and various other countries.
Recently, however, a whole new type of dual residency has become relevant: dual provincial residency. This has become an issue due to the widely varying provincial tax rates among the provinces. If you have clients in more than one province, you're certainly aware of the differences - and they can be substantial. For example, B.C. advisors who have Alberta clients are perhaps most acutely aware of this variance due to Alberta's flat tax of 10 per cent, which gives rise to Alberta's top marginal rate of only 39 per cent. This is nearly five per cent lower than B.C.'s top rate of almost 44 per cent. In fact, Canada's average top combined federal and provincial marginal personal tax rate in 2004 was approximately 45 per cent.
As a result of this wide disparity in income tax rates across the provinces, there has been a renewed interest in "interprovincial" tax planning. Unfortunately, being able to benefit from Alberta's low tax regime is not as simple as maintaining a post-office box or mailing address in Alberta or even owning a recreational property there.
Under the tax law, Canadians must pay provincial tax on their worldwide income based on a taxpayer's residence in a particular province on December 31st. That being said, merely choosing to vacation in Banff annually on New Year's Eve won't make you a "resident" of Alberta. The determination of provincial residency goes beyond mere "physical presence" on the last day of the year and also looks to the province where the individual has the "most significant residential ties".
Significant residential ties include the location of an individual's home, his or her spouse and family. Secondary ties to a province may include maintaining a recreational membership in the province, using that province's hospital or medical insurance coverage, continuing to drive a vehicle registered in the province and holding a driver's licence from that province.
Resident in two provinces
In an interesting technical interpretation (2004-0057301E5) released last year, the Canada Revenue Agency (CRA) was asked how an individual's province of residence would be affected when the individual has a spouse in one province and a home in another province. The individual was living, working and paying taxes in Ontario, where he leased an apartment in which he had shared custody of his daughter. He also worked roughly once a week in Quebec, but neither rented nor owned property there. He was planning to marry a Quebec resident who would continue to live primarily in Quebec and he was concerned about being considered a Quebec resident, since Quebec's tax rates are significantly higher than Ontario's.
The CRA's general thoughts on the determination of an individual's residence are set out in its Interpretation Bulletin IT-221R3. The CRA introduces the bulletin by saying that many of the comments discussed therein apply equally to determinations of residence status for provincial as well as federal tax purposes.
The CRA acknowledges that in some cases an individual could be considered to be a resident in more than one province on December 31st of a particular year. For provincial tax purposes, however, the individual would be considered to be a resident only in the province where he or she has the "most significant residential ties" as discussed above. A spouse would certainly be a significant residential tie to a province, but in the technical interpretation, the CRA stated it would also look to the province in which he had the "most secondary residential ties".
Interprovincial tax planning
There is some planning that can be done to take advantage of other provinces' tax rates. Such planning is complex, often making use of either trusts or corporations. To learn more about the types of structures and how they are being used, a good reference is Calgary lawyer Sian Matthews' excellent article, delivered at the Canadian Tax Foundation's annual conference this past fall, entitled "Water Runs Downhill - Interprovincial Tax Planning".