Ontario Clamps Down on Alberta-Bound Taxes

There are many reasons why Ontario residents might want to be part of the Alberta experience: the Rockies, wide open spaces, clean air, and last, but not least, lower taxes.The combined federal-provincial corporate income tax rates for small businesses in Alberta are 2.5 points lower than in Ontario. The combined top marginal personal income tax rate is almost 7.5 points lower.

On a personal basis, province of residency is established on December 31 of the current tax year. Spending Christmas and New Year's in Banff doesn't meet the residency test, although canny taxpayers have tried. Province of residency usually means the province where you have your most significant residential ties, including the location of your home, spouse and dependants.

Possessing the appropriate driver's licence and using a province's medical insurance coverage would also be considered secondary ties to a particular province.

In a situation where an individual has divorced and started a new family in another province, the Canada Revenue Agency will carefully consider a residency application in either province as long as significant ties are maintained in both locations.

Some flexibility in province of residency for tax purposes also is available to students living and studying in another province. The residency tests differ in the United States, where a New York court recently found that a computer programmer who lived in Nashville, Tennessee, but "commuted electronically" to his employer in New York would have to pay the appropriate New York state income taxes. New York's solicitor general's office maintained that if "New York provides the job, New York provides the professional opportunity, then New York should be able to tax that income even if the employee for his own convenience was working outside New York state."

Savings schemes

Tax advisers have developed aggressive interprovincial tax planning schemes that include changing the residency of corporations and trusts to Alberta from provinces with higher income tax rates. For example, there is an incentive for related companies to move intellectual property to low-tax provinces and carry out internal transactions between their units in a manner that exploits the lower tax jurisdiction.

This provides cause for concern in Ontario, which sees such tax avoidance arrangements as a threat to its provincial tax base. The province has taken a page from the federal tax book that states it is irrelevant whether a corporation is incorporated inside or outside Canada. Federal tax liability is based on residency of the business.

For corporate taxation years ending after May 11, 2005, Ontario is applying the same test to corporations incorporated outside Ontario but doing business in Ontario. If the corporation is resident in and carrying on business in Ontario, it is liable to pay Ontario corporate income taxes even if it is incorporated outside the province. Like Ontarians, residents of British Columbia and Saskatchewan pine for Alberta's low taxes.

As a result, the Canada Revenue Agency has started to closely monitor residents living in these two adjoining provinces who file their returns as Alberta residents.