The Lawyers Weekly - August 20, 2010

THE LAWYERS WEEKLY
August 20, 2010 | 23

BUSINESS
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RYAN REMIOREZ / THE CANADIAN PRESS
Conrad Black and his wife Barbara Amiel leave court after his bail hearing at Federal Court on July 23, 2010 in Chicago.

Black’s war on taxes

Poor Lord Black of Cross-harbour! He is at war with the United States government. Just as his spirits were lifted by the judiciary — the United States Supreme Court narrowed the scope of the “honest services” doctrine so that it would not apply to individuals in his circumstances — resulting in his being granted bail pending further appeals. The executive branch kicked him in the shins with a US$71 million income tax assessment for unpaid taxes and penalties. Meanwhile, the Securities & Exchange Commission is lurking in the background with its civil charges.

Lord Black repudiates the tax assessments, saying that he is not liable for taxes as he is neither a resident nor citizen of the United States. If only tax law was that simple.

Like Canada, the United States bases its jurisdiction to tax on the relationship between the taxpayer and his or her residence in the country. Residence based systems typically tax persons on their worldwide income.

Countries use economic and social nexus with the country to determine residence status. For example, one may determine residence by factual criteria: physical and financial nexus connections with the country, a job, home, family, bank accounts and social connections.

Factually-based tests, however, are necessarily uncertain. Hence, some countries supplement such criteria with more precise bright line tests.

Canada, for example, deems a taxpayer to be a resident if she or he sojourns for 183 days or more in the year in Canada. The United States uses a more complex weighted average formula that looks at an individual’s presence in the country over the immediate past three years. Under the formula, an individual who is in the country for more than 121 days a year in each of the past three years is deemed a U.S. resident.

To be sure, these are arbitrary
numbers. Nevertheless, they

TAX VIEWS

VERN
KRISHNA

“

As Lord [Conrad]
Black will no doubt
discover, the tax
collector is far more
brutal and subject
to fewer judicial
restraints than
the criminal
justice system.

provide some certainty in determining residence for tax purposes. However, they also create the potential for double taxation where one country claims jurisdiction over a taxpayer based on his factual nexus with the country and another country claims jurisdiction over the taxpayer based on a mechanical rule. Tax treaties attempt to resolve double tax claims.

Most countries do not use nationality as a basis for taxation. The notable exception is the United States, which taxes its citizens, regardless where they live. U.S. citizens must file tax returns even if they live abroad. However, the U.S. exempts a substantial portion of a non-resident citizen’s foreign earnings from tax.

There is, however, a third basis
for taxation: source of income. The
theory of source-based taxation is
that the country where the income
originates should be entitled to tax
foreign investors who use the
country’s economic and political
resources to produce the income.
For example, regardless of resi-
dence or citizenship, a country
may tax a foreign investor who
derives investment or employ-
ment income in the country.

Vern Krishna is tax counsel
with Borden Ladner Gervais LLP
and executive director of the CGA
Tax Research Centre at the Uni-
versity of Ottawa.
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