The client is a mechanical engineer, born and educated in England. The client was married in England in 1962 and he and his wife, Dawn, had three sons born in 1964, 1966, and 1969. In 1967, the client and his wife and family moved to Canada where he immediately commenced employment with Imperial Oil in Sarnia, Ontario. With Imperial Oil and/or its parent corporation, Exxon Corporation, the client and his family moved to various locations throughout Canada until 1988. In 1988, while residing and working in Edmonton, Alberta, the client was offered the position as deputy manager of the Exxon refinery at Port Dickson in Malaysia. He accepted the position because it presented the opportunity to likely become manager of this same refinery within a three-year period.
At the time of his acceptance of the above position, the client and his wife were experiencing marriage difficulties. As a result of these difficulties, it was mutually agreed that the client would go to Malaysia on his own. His wife and youngest son remained in the family home in Edmonton. His older sons were living on their own by this time.
The client and his employer undertook the following steps in preparation for his move from Canada:
• His employer obtained a work permit for him in Malaysia;
• He sold his car;
• He cancelled his provincial health plan;
• His employer obtained private health insurance for him;
• He closed all of his existing bank accounts at Royal Bank;
• He opened a savings account at the Bank of Nova Scotia because this bank had a branch in Kuala Lumpur, the capital of Malaysia;
• He allowed his membership in the Edmonton Petroleum Club to lapse; and
• He allowed his participation in the Model Guided Plane Association to lapse.
The client moved to Malaysia in the last few days of September 1988. He stayed in a hotel in Malaysia for the first few weeks and then moved into a company-provided home. His employer charged him with a monthly rent of $1,000 for his use of this house. He took the following items with him from Canada to Malaysia:
• All of his clothes and personal effects; and
• An airplane kit for model guided planes and a radio control transmitter for his hobby of model guided planes.
Once in Malaysia, the client undertook to establish Port Dickson as his home. To this end, he:
• Purchased a car;
• Obtained a Malaysian driver's licence;
• Joined the Port Dickson yacht club which was, in fact, a social/recreational club;
• Joined the petroleum club at Kuala Lumpur;
• Opened a chequing account at the Bank of Nova Scotia in Kuala Lumpur;
• Opened a chequing account at the Standard Chartered Bank at Port Dickson;
• Acquired two Malaysian credit cards;
• Became a patient at a Port Dickson medical clinic and, as well, made regular visits to a dentist in Port Dickson; and
• Joined the Port Dickson Golf Club in 1991.
In accordance with Exxon corporate policy, the client remained on the payroll and in the pension plan of the Canadian subsidiary. His monthly pay was deposited into his Edmonton bank account. There was no income tax withheld at source on the client's salary because the Canadian subsidiary knew that he was working full-time outside of Canada. The total cost of his salary and related benefits (including pension) were charged by the Canadian subsidiary to Exxon Corporation International.
The client made only two visits to Canada during the period from 1989 through 1994. He visited for 14 days in 1990 and 14 days again in 1992. On each of these visits, he stayed in the family home in Edmonton. During the same period, the client's spouse made eight visits to him in Malaysia. She made no visits after January 1992, but prior to that time, the length of her visits ranged from 19 days to 32 days. On each of these visits, she stayed with the client in his Malaysian home. The client and his wife remained married throughout the relevant period.
The client maintained the following Canadian investments while he was residing in Malaysia:
• His 50% interest in the family home in Edmonton;
• A 50% investment in a rental property which his wife purchased after his move to Malaysia, because she thought it would be a good investment;
• His RRSP;
• His company savings plan; and
• A few personal shares in Canadian public companies.
He did maintain his memberships in the Canadian Society of Mechanical Engineers and the Association of Professional Engineers and Geologists of Alberta.
The client became manager of the Port Dickson plant in 1991 and eventually retired from Exxon in the summer of 1995 under the terms of an early retirement package. Upon retirement from Exxon, the client returned to Edmonton to the family home. In late 1995 the client started seeking employment in Malaysia and in January 1996 he and his wife went to Malaysia hoping that he would find employment and they would both live there. His wife returned to Canada in February 1996 and he moved on to Thailand where he stayed through July 1997 (working for the 12-month period from August 1996 through July 1997). When the Thailand employment ended, the client returned to Canada. He and his wife then worked out a plan of separation.
REQUIRED
Prepare a memo for the tax person in your firm who will advise the client on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation for the period October 1, 1988 through the summer of 1995. Discuss each possible degree of residence and its tax consequences. State your conclusions on this case after weighing the relevance of the facts you have considered.